<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1997
REGISTRATION NO. 333-33275
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
BEST SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
VIRGINIA 7372 54-1222526
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
11413 ISAAC NEWTON SQUARE
RESTON, VA 20190
(703) 709-5200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
TIMOTHY A. DAVENPORT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BEST SOFTWARE, INC.
11413 ISAAC NEWTON SQUARE
RESTON, VA 20190
(703) 709-5200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C>
DAVID SYLVESTER, ESQ. ALEXANDER D. LYNCH, ESQ.
BRENT B. SILER, ESQ. BABAK YAGHMAIE, ESQ.
WILLIAM F. WINSLOW, ESQ. BROBECK, PHLEGER & HARRISON LLP
HALE AND DORR LLP 1633 BROADWAY
1455 PENNSYLVANIA AVENUE, N.W. NEW YORK, NEW YORK 10019
WASHINGTON, DC 20004 (212) 581-1600
(202) 942-8400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 1997
PROSPECTUS
3,650,000 SHARES
[BEST! LOGO]
COMMON STOCK
Of the 3,650,000 shares of Common Stock offered hereby, 2,750,000 shares
are being sold by Best Software, Inc. (the "Company") and 900,000 shares are
being sold by the Selling Shareholders. The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholders. See "Principal and
Selling Shareholders."
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $11.00 and $13.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol BEST.
---------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.......... $ $ $ $
- ------------------------------------------------------------------------------------------------
Total(3)........... $ $ $ $
================================================================================================
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $700,000.
(3) The Selling Shareholders have granted to the Underwriters a 30-day option to
purchase up to 547,500 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Selling Shareholders will
be $ , $ and $ , respectively. See
"Underwriting."
---------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST WILLIAM BLAIR & COMPANY
, 1997
<PAGE> 3
[INSIDE FRONT COVER FOR EDGAR FILING]
The graphics in this portion of the inside front cover consist of a
stylized exclamation point. The dot at the bottom of the exclamation point is
rendered as a wheel consisting of a circular hub and six spokes. The words "Core
Accounting Systems" appear inside the hub. Surrounding the hub in the six spaces
between the spokes are the words "Payroll", "Fixed Asset Management", "Asset
Tracking", "Budgeting*", "Recruiting" and "Human Resources". Below the wheel is
the following: "*currently under development."
THE BEST SOLUTION
The company: A leading provider of asset, human resources and payroll management
software solutions for middle market businesses.
The products: FAS(TM) asset management and Abra(TM) human resources and payroll
management product lines. Cost-effective solutions that complement core
accounting systems.
The technology: Scaleable solutions that support Microsoft operating systems,
including Windows 95 and Windows NT.
The services: Annual and periodic updates, technical support, training and
consulting services, which provide significant recurring revenue.
The expertise: More than a decade of in-depth experience in highly specialized
areas that entail complex, frequently changing laws and regulations.
THE BEST PROFILE
- - More than 40,000 customer locations
- - Over 150 certified VARs
- - Used and referred by Big Six accounting firms
- - Marketing alliances with approximately 20 core accounting and other
industry-specific software vendors.
[BEST LOGO]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus. The Common Stock offered hereby involves a high
degree of risk. See "Risk Factors."
THE COMPANY
The Company is a leading provider of asset, human resources and payroll
management software solutions for middle market businesses. The Company's
feature-rich, cost-effective solutions are easy to implement and enhance
productivity by automating management, compliance and reporting functions in
areas of specialized expertise that entail complex and frequently changing laws
and regulations. The Company's solutions have been designed to complement core
accounting systems and are scaleable from stand-alone desktop applications
running on personal computers to multi-user work group and client/server
programs designed for use on personal computer local area networks. As of June
30, 1997, the Company had over 40,000 licensed customer locations, representing
approximately 115,000 licensed seats.
In order to improve efficiencies and control costs, middle market businesses
are increasingly seeking to automate their asset, human resources and payroll
functions. The Company's suite of software solutions is tailored to meet the
needs of middle market businesses and is designed to increase efficiency by
automating and streamlining the complex processes associated with these
functions. The Company's solutions, which integrate with many core accounting
systems, include its FAS asset management and Abra human resources and payroll
management product lines. The Company's products perform a variety of functions,
including sophisticated depreciation calculations, payroll processing, employee
tracking, employee cost and productivity analyses and tax report and tax form
generation. The Company believes that its solutions provide significant cost
savings opportunities for its customers through improved productivity and
control.
The Company currently derives substantially all of its revenue from its FAS
asset management and Abra human resources and payroll management products lines
and related services and from royalty payments under a certain exclusive
license. In each of fiscal 1995, 1996 and 1997, total revenue attributable to
such sources amounted to approximately $26.2 million, $30.8 million and $38.4
million, respectively. In the three months ended June 30, 1997, total revenue
attributable to such products and related services and license fees amounted to
approximately $10.6 million. As part of the revenues derived from its FAS asset
management and Abra human resources and payroll management product lines, the
Company derives significant recurring revenue from maintenance and support
agreements and other services. In fiscal 1997, approximately 85% of the
Company's customers purchased maintenance and support agreements in connection
with their initial license of the Company's products. The Company achieved
renewal rates of existing maintenance and support agreements of approximately
80% during the same period. Revenue from services, including maintenance and
support agreements, training and consulting services, accounted for
approximately 49% of the Company's total revenue in fiscal 1997. The Company
expects to continue to derive a significant portion of its revenue from
services.
The Company employs a multi-channel sales and marketing strategy, which
includes its network of value-added resellers, accounting firms and consultants,
as well as a direct-response telesales operation, strategic marketing alliances
and its direct sales organization. Numerous accounting firms, including four of
the Big Six, use the Company's solutions internally and the Company regularly
receives customer referrals from offices of the Big Six and other accounting
firms. The Company also has formal and informal marketing alliances with
approximately 20 core accounting and other industry-specific software vendors,
including Great Plains Software, Inc., Platinum Software Corporation, Scala
North America, Inc. and State of the Art, Inc. The Company believes this
diversity of sales and marketing channels permits it to distribute its products
in the most efficient and effective manner, while reducing reliance on any one
channel.
The Company's strategy is to extend its leadership position in the asset,
human resources and payroll management software solutions market and to develop
other specialized and complementary solutions in order to provide its customers
with an integrated suite of products. The Company believes that its large
existing customer base represents a significant potential market for such
products. The Company also intends to continue to make its solutions available
on a variety of platforms, including client/server architecture, in order to
meet its customers' evolving technological needs.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................... 2,750,000 shares
Common Stock offered by the Selling Shareholders...... 900,000 shares(1)
Common Stock to be outstanding after the offering..... 10,865,722 shares(1)(2)(3)
Use of Proceeds....................................... Working capital and other general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol................ BEST
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
--------------------------- -----------------
1995 1996 1997 1996 1997
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue(4)................................. $35,023 $39,229 $39,484 $9,499 $10,646
Gross margin..................................... 26,860 29,422 31,558 7,408 8,805
Operating income................................. 2,338 1,997 5,560 114 867
Net income....................................... $ 3,515 $ 3,527 $ 4,436 $ 80 $ 349
Pro forma net income per share(5)................ $ 0.45 $ 0.04
Pro forma weighted average shares
outstanding(5)................................ 9,809 9,885
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(6)
------- ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 7,429 $ 7,542 $ 37,532
Working capital (deficit).............................. (7,743) (7,630) 22,360
Total assets........................................... 16,815 16,928 46,918
Deferred maintenance and service revenue............... 13,632 13,632 13,632
Redeemable convertible preferred stock................. 500 -- --
Redeemable common stock warrants....................... 792 -- --
Total shareholders' equity (deficit)................... (7,361) (5,956) 24,034
</TABLE>
- ---------------
(1) Includes 55,694 shares to be issued upon the Warrant Exercise (as defined
below), which will be sold by a Selling Shareholder in this offering.
Excludes an additional 33,881 shares to be issued upon the exercise of the
underlying warrant if the Underwriters' over-allotment option is exercised
in full.
(2) Excludes 1,325,699 shares of Common Stock issuable pursuant to options and
warrants (after giving effect to the Warrant Exercise) outstanding at June
30, 1997, at a weighted average exercise price of $2.51 per share,
approximately 180,000 shares of Common Stock to be issuable pursuant to
options currently expected to be granted immediately after the effectiveness
of this offering at an exercise price equal to the initial public offering
price in this offering and 1,720,000 additional shares of Common Stock
reserved for issuance under the Company's stock plans. See
"Management -- Stock Plans" and "Description of Capital Stock -- Warrants."
(3) Gives effect to the Warrant Exercise, the Preferred Stock Conversion (as
defined below) and the Put Elimination (as defined below).
(4) Total revenue in fiscal 1995, 1996 and 1997 includes revenue derived from
certain product lines no longer offered by the Company. Currently, the
Company derives substantially all of its revenue from its FAS and Abra
product lines and from royalty payments under a certain exclusive license
agreement (collectively, the "Ongoing Business"). In each of fiscal 1995,
1996 and 1997, total revenue attributable to the Ongoing Business amounted
to approximately $26.2 million, $30.8 million and $38.4 million,
respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
4
<PAGE> 6
(5) Pro forma to give effect to the Warrant Exercise, the Preferred Stock
Conversion, the Put Elimination and the assumed issuance at an offering
price of $12.00 per share of a sufficient number of shares to fund the
dividends paid in excess of earnings. See Note 1 of Notes to Consolidated
Financial Statements.
(6) Adjusted to reflect the sale of 2,750,000 shares of Common Stock by the
Company at an assumed initial public offering price of $12.00 per share and
the receipt by the Company of the net proceeds therefrom.
------------------------
The Company was incorporated in Virginia in 1982. Unless the context
otherwise requires, the "Company" refers to Best Software, Inc., a Virginia
corporation, and its wholly owned subsidiaries. The Company's principal
executive offices are located at 11413 Isaac Newton Square, Reston, Virginia
20190. The Company's telephone number is (703) 709-5200.
Best Software, FAS, FAS Encore, FASTrack, FAS Report Writer, Abra, Abra
Software, Abra HR, Abra Payroll, Abra Attendance, Abra Applicant, Abra Resume
Scan and Abra People Manager are trademarks, SupportPlus and Abra SupportPlus
are service marks, BEST! (the Best logo) and Abra Train are registered
trademarks, and FAS SupportPlus is a registered service mark of the Company. All
other trademarks and registered trademarks used in this Prospectus are the
property of their respective owners.
------------------------
Unless otherwise indicated, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option, (ii) gives effect to a
3-for-2 stock split, to be effected in the form of a stock dividend prior to the
closing of the offering, (iii) has been adjusted to reflect the partial exercise
of a warrant (the "PNC Warrant") to purchase 55,694 shares of Common Stock
immediately prior to the closing of this offering (the "Warrant Exercise"),
which shares will be sold by a Selling Shareholder in this offering, and (iv)
gives effect to the conversion of all outstanding shares of Class A Preferred
Stock into an aggregate of 625,005 shares of Common Stock and the elimination of
the mandatory redemption feature of the PNC Warrant and certain other warrants
to purchase Common Stock, both of which will occur automatically upon the
closing of this offering (the "Preferred Stock Conversion" and the "Put
Elimination," respectively). See "Description of Capital Stock" and "Principal
and Selling Shareholders." References to the Company's "fiscal" year mean the
twelve months ended on March 31 of that calendar year.
5
<PAGE> 7
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the shares
of Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those contained in the forward-looking statements.
Factors that may cause such differences include, but are not limited to, those
discussed below as well as those discussed elsewhere in this Prospectus.
Significant Fluctuations in Quarterly Operating Results. The Company has
experienced, and expects to continue to experience, significant fluctuations in
its quarterly operating results. There can be no assurance that the Company will
be profitable in any particular quarter. The Company's future quarterly
operating results will depend upon a number of factors, including the demand for
its products, the type and level of services purchased by its customers, the mix
of sales through direct and indirect sales channels, the level of product and
price competition that it encounters, the length of its sales cycles, the timing
of larger customer implementations, the timing and success of sales and
marketing programs, particularly direct mail campaigns, the timing and
acceptance of new product introductions and product enhancements by the Company
and its competitors, the timing and amount of the Company's product development
programs, the mix of products and services sold, the timing of new hires, market
acceptance of new products, competitive conditions in the industry and general
economic conditions. The Company's expense levels are based, in significant
part, on anticipated revenue trends. Because a high percentage of these expenses
are relatively fixed in the short term, if revenue levels fall below
expectations, the Company's operating results are likely to be materially and
adversely affected. Historically, the Company's revenues and earnings for the
first calendar quarter have been lower than those for the preceding quarter
because a disproportionate number of customers purchase the Company's products
in the fourth calendar quarter in anticipation of the close of their own fiscal
years and the ensuing tax season. In addition, margins in the first calendar
quarter have historically been lower due to the shipment by the Company of large
numbers of annual software updates in that quarter reflecting regulatory
changes. The Company anticipates that the sales cycle for its enhanced
client/server products, upon their introduction, will generally be longer than
that associated with its current products. Any significant lengthening of the
Company's sales cycle could have a material adverse effect on the Company's
business, operating results and financial condition and, in particular, could
contribute to significant fluctuations in operating results on a quarterly
basis. As a result of these and other factors, the Company's quarterly operating
results are subject to variation, and the Company believes that
quarter-to-quarter comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
In addition, due to all the foregoing factors, the Company's operating results
in future periods may be below the expectations of securities analysts and
investors. In that event, the market price of the Company's Common Stock would
likely be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Selected Quarterly
Operating Results."
Product Concentration; Discontinued Product Lines. The Company currently
derives substantially all of its revenue from its FAS and Abra product lines and
related services. These product lines are expected to continue to account for a
substantial portion of the Company's revenues for the foreseeable future.
Accordingly, the Company's future operating results will depend, in part, on
maintaining and increasing acceptance of these products and related services.
Any factors adversely affecting the pricing of or demand for these products and
services or an increase in competition for such products and services could have
a material adverse effect on the Company's business, operating results and
financial condition. The Company's historical consolidated financial statements
for the applicable periods include results of operations relating to certain
product lines subsequently sold or licensed by the Company. Accordingly, the
Company's historical consolidated financial statements are not indicative of
operating results attributable to the Ongoing Business. In addition, the Company
derives revenue from the exclusive license of its MYOB product line to a third
party (the "MYOB
6
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License"), which will expire in June 2000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
New Products and Rapid Technological Change. The market for business
application software is characterized by rapid technological advancements,
changes in customer requirements, frequent new product introductions and
enhancements and changing industry standards. The life cycles of the Company's
products are difficult to estimate and the Company's current market position
could be undermined by rapid technological changes and the introduction of new
products and enhancements by new or existing competitors. The Company's growth
and future success will depend, in part, upon its ability to enhance its current
products and introduce new products in order to keep pace with products offered
by the Company's competitors, adapt to technological advancements and changing
industry standards and produce additional functionality to address the
increasingly sophisticated requirements of its customers. The Company currently
has a number of new product development efforts underway, including the
development of enhanced client/server versions of its FAS and Abra products and
the development of a new budgeting software product. The Company's product
development efforts are expected to require substantial additional investment by
the Company. There can be no assurance that the Company will have sufficient
resources to make the necessary investment or that it will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new products or enhancements. In addition, there
can be no assurance that such products or enhancements will meet the
requirements of the marketplace or achieve market acceptance or that the
Company's customers will migrate to client/server environments at the rate
expected by the Company. If the market for the Company's products shifts rapidly
towards the client/server environment, the absence of enhanced client/server
versions of its FAS and Abra products, or any delay in the commercial
availability or market acceptance of such products, could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the Company's enhanced client/server products are being
developed to operate on corporate Intranets, among other applications, and the
success of these products will depend upon growth in the number of middle market
businesses implementing corporate Intranets. If businesses do not adopt and
deploy corporate Intranets at the rate anticipated by the Company, the Company's
business, operating results and financial condition may be materially and
adversely affected. Any failure by the Company to anticipate or respond
adequately to technological advancements, customer requirements and changing
industry standards, or any significant delays in the development, introduction
or availability of new products or enhancements, could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Product Development."
Product Migration. Prior to fiscal 1994, substantially all of the
Company's revenue from its FAS and Abra products was derived from DOS-based
versions of those products. Since fiscal 1994, when the Company introduced
Windows-based versions of its FAS and Abra products, a significant number of the
Company's DOS installed base of customers for these product lines has migrated
to the Company's Windows-based products. However, there can be no assurance that
in the future a significant percentage of the Company's remaining installed base
of DOS customers will migrate to the Company's Windows-based products. In
particular, the Company believes that smaller customers are less likely to
migrate to the Company's Windows-based products because the cost of migrating is
high relative to their size and because, in many cases, the DOS-based products
adequately meet their needs. If a significant number of the Company's remaining
DOS customers elect not to migrate to the Company's Windows-based products,
purchase competitive products or encounter problems in implementing the
Company's Windows-based products, the Company's business, operating results and
financial condition could be materially and adversely affected.
Risks Associated with Sales Channels. To date, the Company has sold its
products and services primarily through a network of value-added resellers,
accounting firms and consultants (together, "Business Partners"), a
direct-response telesales operation, strategic marketing alliances and a direct
sales force focusing on national accounts. The Company's ability to achieve
significant revenue growth in the future will depend, in large part, upon its
ability to establish and maintain relationships with its
7
<PAGE> 9
Business Partners, strategic alliance partners and national accounts and upon
the success of its direct mail campaigns and telesales efforts. The Company's
ability to successfully market its products, including its enhanced
client/server products under development, will depend on its ability to adapt
its sales channels to address the evolving markets for such products. Failure to
do so could have a material and adverse effect on the Company's business,
operating results and financial condition. See "Business -- Strategy" and
"Business -- Sales and Marketing."
The Company's ability to achieve significant revenue growth in the future
will depend, in part, on its success in recruiting and training sufficient
direct sales personnel and expanding its Business Partner network. Although the
Company is currently investing, and plans to continue to invest, significant
resources to develop and expand its direct sales force and Business Partner
network, the Company has at times experienced and may continue to experience
difficulty in recruiting qualified personnel for its direct sales force and
identifying, certifying, and/or maintaining qualified Business Partners. There
can be no assurance that the Company will be able to maintain or successfully
expand its direct sales force or Business Partner network or that any such
expansion will result in an increase in revenue. Further, there can be no
assurance that a sufficient number of direct sales personnel or Business
Partners will be able to successfully address the client/server market. Any
failure by the Company to expand its direct sales force or its Business Partner
network could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, if the Company is
successful in expanding its direct sales force, there can be no assurance that
its direct sales personnel will be successful in increasing the Company's
revenue to a sufficient extent to cover the increased expenses associated with
such expansion. The Company's agreements with its Business Partners generally
are nonexclusive and may be terminated by either party at any time without
cause. The Company's Business Partners are not within the control of the
Company, are not obligated to purchase products from the Company and may also
represent or refer product lines of its competitors. Business Partners' sales
tend to fluctuate based on their implementation schedules and internal
resources, which are beyond the control of the Company. There can be no
assurance that these Business Partners will continue their current relationships
with the Company or that they will not give higher priority to the sale or
referral of other products, which could include products of competitors. A
reduction in sales efforts or discontinuance of sales or referrals of the
Company's products by its Business Partners could lead to reduced sales and
could materially adversely affect the Company's business, operating results and
financial condition. The Company expects that any material increase in the
Company's indirect sales as a percentage of total revenue will materially and
adversely affect the Company's average selling prices and gross margins due to
the lower unit prices that the Company receives through indirect channels.
The Company's strategy of marketing its products directly to end users and
indirectly through its Business Partners may result in distribution channel
conflicts. The Company's direct sales efforts may compete with those of its
indirect channels and, to the extent more than one Business Partner targets the
same customer, such Business Partners may come into conflict with each other.
There can be no assurance that channel conflict will not adversely affect the
Company's relationships with its customers or Business Partners or its ability
to attract other Business Partners. See "Business -- Sales and Marketing."
Competition. The market for the Company's products is intensely
competitive and rapidly changing. The Company faces different competitors for
each of its product lines. The Company's asset management products compete
principally with products offered by the Bureau of National Affairs, Inc. in the
single-user and work group environments, and the Company anticipates that its
enhanced client/server asset management products, when introduced, will compete
with products offered by PeopleSoft, Inc., Oracle Corporation and others. The
Company's human resources and payroll management products compete primarily with
products offered by Spectrum Human Resources Corporation, Human Resources
Microsystems and Ceridian Corporation (FLX) in the single-user and work group
environment, and the Company anticipates that its enhanced client/server human
resources and payroll products, when introduced, will compete with products
offered by PeopleSoft,
8
<PAGE> 10
Inc., Ultimate Software Group, Inc. and SAP AG in the client/server environment.
The Company's human resource and payroll management products also compete with
payroll service bureaus, such as ADP, Inc. and PayChex, Inc., and with in-house
management information systems staffs. Some of the Company's existing
competitors, as well as a number of potential new competitors, have larger
technical staffs, more established and larger sales and marketing organizations
and greater financial resources than the Company. There can be no assurance that
the Company will continue to compete successfully with its existing competitors
or will be able to compete successfully with new competitors. In addition, there
can be no assurance that competitors will not develop products that are superior
to the Company's products or achieve greater market acceptance. Competitive
pressures in the form of aggressive price competition could also have a material
adverse effect on the Company's business, operating results and financial
condition. The Company's future success will depend significantly upon its
ability to increase its share of its target markets, to maintain and increase
its renewal revenues from existing customers and to sell additional products,
product enhancements, maintenance and support agreements and training and
consulting services to existing customers and new customers. There can be no
assurance that the Company will continue to compete favorably or that
competition will not have a material adverse effect on the Company's business,
operating results or financial condition.
Timely Release of Periodic Updates to Reflect Tax Law and Other Regulatory
Changes. The Company's asset, human resources and payroll management software
products are affected by changes in laws and regulations and generally must be
updated annually or periodically to maintain their accuracy and competitiveness.
There can be no assurance that the Company will be able to release these annual
or periodic updates on a timely basis in the future. Failure to do so could have
a material adverse effect on market acceptance of the Company's products, which
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, significant changes in tax laws
and regulations or other regulatory provisions applicable to the Company's
products could require the Company to make a significant investment in product
modifications, which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business -- Products"
and "Business -- Product Development."
Product Errors; Product Liability. Software products such as those offered
by the Company typically contain undetected errors or failures when first
introduced or as new versions are released. Testing of the Company's products is
particularly challenging because it is difficult to simulate the wide variety of
computing environments in which the Company's customers may deploy these
products. Despite extensive testing, the Company from time to time has
discovered defects or errors in its products. Accordingly, there can be no
assurance that such defects, errors or difficulties will not cause delays in
product introductions and shipments, result in increased costs and diversion of
development resources, require design modifications or decrease market
acceptance or customer satisfaction with the Company's products. In addition,
there can be no assurance that, despite testing by the Company and by current
and potential customers, errors will not be found after commencement of
commercial shipments, resulting in loss of or delay in market acceptance, which
could have a material adverse effect upon the Company's business, operating
results and financial condition.
Although the Company has not experienced any material product liability
claims to date, the sale and support of software products and the performance of
related services by the Company entails the risk of such claims. Many of the
Company's products and services are used by or performed for customers in
connection with the preparation and filing of tax returns and other regulatory
reports. If any of the Company's products contain errors that produce inaccurate
results upon which users rely, or cause users to misfile or fail to file
required information, the Company could be subject to liability claims from
users which could, in turn, materially adversely affect the Company's business,
operating results and financial condition. The Company attempts to limit its
product liability exposure to users through contractual limitations on
liability, including appropriate disclaimers in its "shrink wrap" license
agreement with end users. The Company's software license agreements generally
provide that the software is provided "as is" without warranty of any kind.
There can be no assurance, however, that the contractual limitations used by the
Company will be enforceable or will provide the Company
9
<PAGE> 11
with adequate protection against product liability claims. The Company also
maintains errors and omissions insurance. There can be no assurance, however,
that such coverage will be sufficient to cover any claims made in the future,
will continue to be available on reasonable terms, or that the insurer will not
disclaim coverage as to any future claim. A successful claim for product or
service liability brought against the Company could have a material adverse
effect upon the Company's business, operating results and financial condition.
Acquisitions. The Company may, from time to time, pursue acquisitions of
businesses, customer bases, products or technologies that complement or expand
its existing business. The Company evaluates potential acquisition opportunities
from time to time, including those that could be material in size and scope.
Acquisitions involve a number of risks, including the diversion of management's
attention from day-to-day operations to the assimilation of the operations and
personnel of the acquired companies and the incorporation of acquired
operations, customer bases, products or technologies. Such acquisitions could
also have adverse short-term effects on the Company's operating results, and
could result in dilutive issuances of equity securities, the incurrence of debt
and the loss of key employees. In addition, many business acquisitions must be
accounted for as purchases and, because most software-related acquisitions
involve the purchase of significant intangible assets, these acquisitions
typically result in substantial amortization charges and charges for acquired
research and development projects, which could have a material adverse effect on
the Company's operating results. There can be no assurance that any such
acquisitions will occur or that, if such acquisitions do occur, the acquired
businesses, customer bases, products or technologies will generate sufficient
revenue to offset the associated costs or effects.
Protection of Intellectual Property; Risks of Infringement. The Company's
success is heavily dependent upon its proprietary technology. The Company
regards its software as proprietary, and relies primarily on a combination of
trade secret, copyright and trademark law, trade secret, confidentiality
agreements and contractual provisions to protect its proprietary rights. The
Company has no patents or patent applications pending, and existing trade secret
and copyright laws afford only limited protection. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult and, while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem, particularly in international markets and as a
result of the growing use of the Internet. In selling its products, the Company
relies primarily on "shrink wrap" licenses that are not signed by licensees and,
therefore, it is possible that such licenses may be unenforceable under the laws
of certain jurisdictions. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. There can be no assurance that the steps taken by the Company
to protect its proprietary rights will be adequate or that the Company's
competitors will not independently develop products or technologies that are
substantially equivalent or superior to the Company's products or technologies.
The Company is not aware that any of its products, trademarks or other
proprietary rights infringe the proprietary rights of third parties. However,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products. As
the number of software products in the industry increases and the functionality
of these products further overlap, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time-consuming and expensive to defend, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty agreements, if required, may not be available on terms
acceptable to the Company, or at all, which could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business -- Intellectual Property Rights and Licenses."
International Operations. Although the Company's revenue from
international sales has historically been insignificant, the Company recently
opened an office in Canada and intends to increase its
10
<PAGE> 12
sales and marketing efforts in other international markets. The Company
anticipates that its international operations will require the Company to
recruit and hire a number of new consulting, sales and marketing and support
personnel in Canada and other countries in which the Company establishes
operations. In addition, the Company has only limited experience in developing
localized versions of its products and in marketing and distributing its
products internationally. Moreover, the Company does not currently have
relationships with any Business Partners that target international markets. The
Company's international sales and marketing efforts will require significant
investment by the Company in advance of anticipated future revenue. There can be
no assurance that the Company's international sales and marketing efforts will
be successful or will generate significant revenue. There are a number of other
risks inherent in international business activities, including costs and risks
of localizing products for foreign countries, unexpected changes in regulatory
requirements, tariffs and other trade barriers, longer accounts receivable
payment cycles, difficulties in managing international operations, potentially
adverse tax consequences, currency fluctuations, difficulties in the
repatriation of earnings, the burdens of complying with a wide variety of
foreign laws and exposures to gains and losses on foreign currency transactions.
There can be no assurance that such factors will not have a material adverse
effect on the Company's business, operating results or financial condition. See
"Business -- Strategy."
Reliance on Microsoft Technologies. The Company's software products are
designed primarily to operate with Microsoft technologies, including Windows NT,
Windows 95, Windows 3.x, SQL Server, Visual FoxPro and Visual Basic, and the
Company's strategy requires that its products and technology be compatible with
new developments in Microsoft technology. A decreasing portion of the Company's
products are also designed to operate with Microsoft DOS. Although the Company
believes that Microsoft technologies are currently widely utilized by businesses
of all sizes, there can be no assurance that businesses will continue to adopt
such technologies as anticipated, will migrate from older Microsoft technologies
(such as DOS or earlier versions of Windows) to newer Microsoft technologies or
will not adopt alternative technologies that the Company does not support. If
businesses do not migrate from older technologies and adopt the Microsoft
technologies with which the Company's products are compatible, the Company's
business, operating results and financial condition will be materially and
adversely affected.
Dependence on Key Personnel. The Company's success depends, in significant
part, upon the continued services of its key technical, marketing, sales and
management personnel and on its ability to continue to attract, motivate and
retain highly qualified employees. The loss of key personnel could have a
material adverse effect on the Company's business, operating results and
financial conditions. The Company does not maintain key person life insurance on
any of its employees. Although the Company has employment agreements with
certain key employees, these employees, like all other employees, may
voluntarily terminate their employment with the Company at any time. Competition
for technical, marketing, sales and management employees is intense and the
process of locating personnel with the combination of skills and attributes
required to execute the Company's strategy can be difficult, time-consuming and
expensive. There can be no assurance that the Company will be successful in
attracting or retaining highly skilled technical, management, sales and
marketing personnel and the failure to attract, hire, assimilate or retain such
personnel could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management."
Control by Principal Shareholders, Officers and Directors. Upon completion
of this offering, the present directors, executive officers and principal
shareholders of the Company and their affiliates will beneficially own
approximately 58.6% of the outstanding Common Stock (53.8% if the Underwriters'
over-allotment option is exercised in full). As a result, these shareholders
will be able to exercise control over all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. See "Management" and
"Principal and Selling Shareholders."
11
<PAGE> 13
Benefits of the Offering to Current Shareholders. The Selling
Shareholders, including executive officers, directors and significant
shareholders of the Company, will sell an aggregate of 900,000 shares of Common
Stock in this offering and will receive an aggregate of approximately $10.0
million in net proceeds, based upon an assumed initial public offering price of
$12.00 per share and after deducting the estimated underwriting discount. In
addition, all of the current shareholders of the Company will benefit from the
creation of a public market for the Common Stock held by them. Following the
offering, the executive officers and directors of the Company will beneficially
own shares of Common Stock having a market value of $72.8 million, based upon
the assumed initial public offering price of $12.00 per share. The average price
per share paid to the Company upon the issuance of the shares held by the
current shareholders was $0.18. See "Dilution" and "Principal and Selling
Shareholders."
Dilution. Purchasers of the Common Stock offered hereby will experience
immediate and significant dilution in the pro forma net tangible book value of
$9.79 per share. To the extent outstanding options or warrants to purchase the
Company's Common Stock are exercised, there will be further dilution to the new
public investors. See "Dilution."
Broad Discretion in Allocation of Net Proceeds. The primary purposes of
this offering are to establish a public market for the Company's Common Stock,
to facilitate the Company's future access to public equity markets and to obtain
additional working capital. The Company intends to use the net proceeds of this
offering for general corporate purposes, including product development and
working capital. The Company may use a portion of the net proceeds of the
offering to acquire or invest in businesses, technologies or products
complementary to the Company's business. There are no current agreements or
negotiations with respect to any acquisitions, investments or other
transactions. As of the date of this Prospectus, the Company has no specific
plans to use the net proceeds of this offering and will have broad discretion in
the application of the proceeds. See "Use of Proceeds."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Company's Common Stock and
there is no assurance that an active trading market will develop or be sustained
after this offering. The initial public offering price will be determined
through negotiations among the Company and the Representatives of the
Underwriters and may not be indicative of the market price of the Common Stock
after this offering. The trading price of the Common Stock is likely to be
highly volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, developments with respect to patents, copyrights or proprietary
rights, conditions and trends in the software industry, changes in financial
estimates by securities analysts, general market conditions and other factors.
In addition, the public equity markets have from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the stock of technology companies. These broad market
fluctuations, as well as shortfalls in sales or earnings as compared with
securities analysts' expectations, changes in such analysts' recommendations or
projections and general economic and market conditions, may materially and
adversely affect the market price of the Company's Common Stock. See
"Underwriting."
Shares Eligible for Future Sale. Sales of substantial amounts of the
Company's Common Stock in the public market after this offering, or the
perception that such sales might occur, could adversely affect prevailing market
prices for the Common Stock. Upon completion of this offering, the Company will
have outstanding 10,865,722 shares of Common Stock. Of these shares, the
3,650,000 shares offered hereby will be freely tradable without restriction in
the public market. Approximately 827,673 additional shares will be eligible for
immediate sale as of the date of this Prospectus (of which 393,834 will be
subject to 180-day lock-up agreements between certain shareholders and the
Representatives of the Underwriters), and approximately 6,382,383 additional
shares will be eligible for sale beginning 90 days after the date of this
Prospectus (of which 4,319,610 will be subject to 180-day lock-up agreements).
Hambrecht & Quist LLC may, in its sole discretion and at any time without
notice, release all or any portion of the shares subject to such lock-up
agreements. In addition, the Company intends to file registration statements on
Form S-8 under the Securities Act of 1933, as amended (the "Securities
12
<PAGE> 14
Act"), on or about the date of this Prospectus to register all shares of Common
Stock issued or reserved for issuance under its stock plans. In addition, the
holders of approximately 6,735,433 shares of Common Stock are entitled to
registration rights with respect to such shares. See "Management -- Stock
Plans," "Description of Capital Stock -- Registration Rights" and "Shares
Eligible for Future Sale."
Anti-takeover Effect of Certain Charter, By-Law and Statutory Provision;
Possible Issuance of Preferred Stock. The Company's Amended and Restated
Articles of Incorporation and Amended and Restated By-Laws, as well as Virginia
corporate law, contain certain provisions that could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. These provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. Certain of these provisions allow the
Company to issue without shareholder approval preferred stock having rights
senior to those of the Common Stock. Other provisions impose various procedural
and other requirements that could make it more difficult for shareholders to
effect certain corporate actions. In addition, the Company's Board of Directors
is divided into three classes, each of which will serve for a staggered
three-year term, which may make it more difficult for a third party to gain
control of the Company's Board of Directors. See "Description of Capital
Stock -- Virginia Law and Certain Charter and By-Law Provisions."
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,750,000 shares of
Common Stock offered by it hereby are estimated to be approximately $30.0
million at an assumed initial public offering price of $12.00 per share after
deducting the estimated underwriting discount and the estimated expenses of the
offering. The Company will not receive any proceeds from the sale of shares by
the Selling Shareholders.
The principal purposes of this offering are to establish a public market
for the Company's Common Stock, to facilitate future access by the Company to
public equity markets and to obtain additional working capital. The Company
intends to use the net proceeds for general corporate purposes, including
product development and working capital. The Company may also use a portion of
the net proceeds to acquire or invest in businesses, technologies or products
complementary to the Company's business. There are no current agreements or
understandings with respect to any acquisitions, investments or other
transactions, no such acquisitions, investments or transactions are being
planned or negotiated as of the date of this Prospectus, and no portion of the
net proceeds has been allocated for any specific acquisition.
Pending any such uses, the Company intends to invest the net proceeds from
the offering in investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company paid a dividend of $3,556,264 in the aggregate ($0.455 per
share of Common Stock) to shareholders of record on February 20, 1997 and a
dividend of $7,565,114 in the aggregate ($0.915 per share of Common Stock) to
shareholders of record on June 27, 1997. Other than these dividends, the Company
has never paid cash dividends on its Common Stock. The Company currently intends
to retain any future earnings to fund the development and growth of its
business, and does not anticipate paying any cash dividends for the foreseeable
future.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 (i) on an actual basis, (ii) on a pro forma basis giving effect to the
Warrant Exercise, the Preferred Stock Conversion and the Put Elimination and
(iii) as adjusted to give effect to the sale of 2,750,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$12.00 per share and after deducting the estimated underwriting discount and
estimated offering expenses payable by the Company. This information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere is this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable, net of current portion..................... $ 650 $ 650 $ 650
Redeemable convertible preferred stock.................... 500 -- --
Redeemable common stock warrants.......................... 792 -- --
Shareholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; none issued or outstanding............. -- -- --
Common stock, no par value; 40,000,000 shares
authorized; 7,435,023 shares issued and
outstanding, actual; 8,115,722 shares issued and
outstanding, pro forma; 10,865,722 shares issued
and outstanding, as adjusted(1).................... 785 1,491 31,481
Additional paid-in capital................................ -- 699 699
Accumulated deficit....................................... (8,146) (8,146) (8,146)
------- ------- -------
Total shareholders' equity (deficit)............ (7,361) (5,956) 24,034
------- ------- -------
Total capitalization....................... $(5,419) $(5,306) $24,684
======= ======= =======
</TABLE>
- ---------------
(1) Gives effect to an amendment of the Company's Amended and Restated Articles
of Incorporation, filed subsequent to June 30, 1997, increasing the number
of authorized shares of Common Stock. Excludes 1,325,699 shares of Common
Stock issuable pursuant to options and warrants (after giving effect to the
Warrant Exercise) outstanding at June 30, 1997, at a weighted average
exercise price of $2.51 per share, approximately 180,000 shares of Common
Stock to be issuable pursuant to options currently expected to be granted
immediately after the effectiveness of this offering at an exercise price
equal to the initial public offering price in this offering and 1,720,000
additional shares of Common Stock reserved for issuance under the Company's
stock plans. See "Management -- Stock Plans" and "Description of Capital
Stock -- Warrants."
15
<PAGE> 17
DILUTION
The deficit in pro forma net tangible book value of the Company at June 30,
1997 was $(6.0 million) or $(0.73) per share of Common Stock. Pro forma net
tangible book value per share is equal to the Company's total tangible assets
less total liabilities, divided by the total number of shares of Common Stock
outstanding, after giving effect to the Preferred Stock Conversion, the Warrant
Exercise and the Put Elimination. After giving effect to the sale by the Company
of the 2,750,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $12.00 per share, and after deducting the estimated
underwriting discount and estimated offering expenses, the pro forma net
tangible book value of the Company as of June 30, 1997 would have been $24.0
million or $2.21 per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value of $2.94 per share to existing
shareholders and an immediate dilution of $9.79 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book deficit per share before the
offering............................................... $(0.73)
Increase per share attributable to new investors.......... 2.94
-----
Pro forma net tangible book value per share after the
offering.................................................. 2.21
------
Dilution per share to new investors......................... $ 9.79
======
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1997,
after giving effect to the Preferred Stock Conversion and the Warrant Exercise,
the difference between existing shareholders and the new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)............... 8,115,722 74.7% $ 1,459,617 4.2% $ 0.18
New investors(1)....................... 2,750,000 25.3 33,000,000 95.8 12.00
---------- ------ ----------- ------
Total................................ 10,865,722 100.0% $34,459,617 100.0%
========== ====== =========== ======
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options or warrants. At June 30, 1997, there were 1,325,699 shares of Common
Stock reserved for issuance upon exercise of outstanding options and warrants
(after giving effect to the Warrant Exercise) at a weighted average exercise
price of $2.51 per share. To the extent that these options or warrants are
exercised, there will be further dilution to new investors. See
"Management -- Stock Plans" and "Description of Capital Stock -- Warrants."
- ---------------
(1) Sales by the Selling Shareholders in this offering will reduce the number of
shares held by existing shareholders to 7,215,722 or 66.4% of the total
number of shares of Common Stock outstanding after this offering (6,668,222
or 61.4%, if the over-allotment option is exercised in full), and will
increase the number of shares held by new investors to 3,650,000 or 33.6%
(4,197,500 or 38.6%, if the over-allotment option is exercised in full) of
the total number of shares of Common Stock outstanding after this offering.
See "Principal and Selling Shareholders."
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. The selected consolidated
statement of operations data set forth below for the fiscal years ended March
31, 1995, 1996 and 1997 and the consolidated balance sheet data as of March 31,
1996 and 1997 are derived from, and are qualified by reference to, the audited
consolidated financial statements included elsewhere in this Prospectus and
should be read in conjunction with those consolidated financial statements and
notes thereto. The selected consolidated statement of operations data presented
below for the fiscal years ended March 31, 1993 and 1994 and the consolidated
balance sheet data as of March 31, 1993, 1994 and 1995 are derived from audited
financial statements not included in this Prospectus. The selected consolidated
financial data for the three-month periods ended June 30, 1996 and 1997 and the
consolidated balance sheet data as of June 30, 1997 are derived from unaudited
financial statements of the Company included elsewhere in this Prospectus which,
in the opinion of management, include all adjustments, consisting solely of
normal recurring adjustments, necessary for a fair presentation of the financial
information set forth therein. The results of operations for the three months
ended June 30, 1997 are not necessarily indicative of the results of operations
to be expected for the full year or for any future period. In addition, the
Company's historical financial statements include results of operations relating
to the Divested Product Lines and the MYOB product line and therefore are not
indicative of the results of operations attributable to the Ongoing Business.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
---------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- -------- ------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
License fees and royalty.......................... $ 9,595 $ 19,339 $20,346 $22,677 $20,161 $5,064 $ 5,358
Services.......................................... 5,932 8,202 14,677 16,552 19,323 4,435 5,288
------- ------- ------- ------- --------- ------ ---------
Total........................................... 15,527 27,541 35,023 39,229 39,484 9,499 10,646
------- ------- ------- ------- --------- ------ ---------
Cost of revenue:
License fees and royalty.......................... 1,150 2,807 3,806 4,501 2,251 577 371
Services.......................................... 662 2,355 4,357 5,306 5,675 1,514 1,470
------- ------- ------- ------- --------- ------ ---------
Total........................................... 1,812 5,162 8,163 9,807 7,926 2,091 1,841
------- ------- ------- ------- --------- ------ ---------
Gross margin........................................ 13,715 22,379 26,860 29,422 31,558 7,408 8,805
------- ------- ------- ------- --------- ------ ---------
Operating expenses:
Sales and marketing............................... 5,114 9,482 11,354 12,812 14,355 3,954 4,305
Research and development.......................... 1,151 2,173 5,707 7,389 6,089 1,817 2,048
General and administrative........................ 4,416 5,797 4,284 5,789 5,554 1,523 1,585
Amortization of acquired intangibles.............. 2,746 1,984 3,177 1,435 -- -- --
Acquired research and development projects........ 2,500 -- -- -- -- -- --
------- ------- ------- ------- --------- ------ ---------
Total........................................... 15,927 19,436 24,522 27,425 25,998 7,294 7,938
------- ------- ------- ------- --------- ------ ---------
Operating income (loss)............................. (2,212) 2,943 2,338 1,997 5,560 114 867
------- ------- ------- ------- --------- ------ ---------
Other income (expense), net:
Interest income (expense), net.................... 78 (424) (176) (145) 351 11 (293)
Gain on sale of product lines..................... -- -- -- 750 -- -- --
------- ------- ------- ------- --------- ------ ---------
Total........................................... 78 (424) (176) 605 351 11 (293)
------- ------- ------- ------- --------- ------ ---------
Income (loss) from continuing operations before
income taxes...................................... (2,134) 2,519 2,162 2,602 5,911 125 574
Income tax benefit (provision)...................... 615 (400) (550) 925 (1,475) (45) (225)
------- ------- ------- ------- --------- ------ ---------
Income (loss) from continuing operations............ (1,519) 2,119 1,612 3,527 4,436 80 349
Gain on disposal of discontinued business........... -- -- 1,903 -- -- -- --
Loss from operations of discontinued business....... (1,563) (8,990) -- -- -- -- --
------- ------- ------- ------- --------- ------ ---------
Net income (loss)................................... $(3,082) $ (6,871) $ 3,515 $ 3,527 $ 4,436 $ 80 $ 349
======= ======= ======= ======= ========= ====== =========
Pro forma net income per share(1)................... $ 0.45 $ 0.04
========= =========
Pro forma weighted average shares outstanding(1).... 9,809 9,885
========= =========
<CAPTION>
MARCH 31, JUNE 30,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 1,657 $ 2,070 $ 3,534 $ 8,105 $13,365 $ 7,429
Working capital deficit............................. (6,141) (12,888) (5,169) (583) (913) (7,743)
Total assets........................................ 19,544 19,633 13,794 17,625 21,160 16,815
Deferred maintenance and service revenue............ 3,828 7,987 8,814 9,398 12,288 13,632
Long-term debt...................................... 6,309 5,119 2,954 2,133 650 650
Redeemable convertible preferred stock.............. 500 500 500 500 500 500
Redeemable common stock warrants.................... 465 206 206 296 642 792
Total shareholders' (deficit)....................... (912) (7,763) (4,202) (698) (144) (7,361)
</TABLE>
- ---------------
(1) Pro forma to give effect to the Warrant Exercise and the Put Elimination and
the assumed issuance at an offering price of $12.00 per share of a
sufficient number of shares to fund the dividends paid in excess of
earnings. See Note 1 of Notes to Consolidated Financial Statements.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
contained in the forward-looking statements. Factors that may cause such
differences include, but are not limited to, those discussed in "Risk Factors"
and elsewhere in this Prospectus. References to the Company's "fiscal" year mean
the twelve months ended on March 31 of that calendar year.
OVERVIEW
The Company is a leading provider of asset, human resources and payroll
management software solutions for middle market businesses. The Company's
feature-rich, cost-effective solutions are easy to implement and enhance
productivity by automating management, compliance and reporting functions in
areas of specialized expertise that entail complex and frequently changing laws
and regulations. The Company's solutions have been designed to complement core
accounting systems and are scaleable from stand-alone desktop applications
running on personal computers to multi-user work group and client/server
programs designed for use on personal computer local area networks. As of June
30, 1997, the Company had over 40,000 licensed customer locations, representing
approximately 115,000 licensed seats.
The Company launched its FAS fixed asset management product line in 1983
and a professional tax preparation software product line in 1985. In 1991, the
Company acquired the Abra human resources and payroll management product line.
Between 1992 and 1994, the Company purchased a write-up product line for
accountants, a small business accounting software product line (the "MYOB
product line") and a service bureau payroll product line for accountants. The
Company thereafter decided to focus primarily on serving middle market
businesses, and sold its professional tax preparation software business in April
1994 and its service bureau payroll and write-up product lines for accountants
in August 1995 (together, the "Divested Product Lines"). In May 1996, the
Company licensed its MYOB product line to a third party. Under such license (the
"MYOB License"), the Company is to receive royalties over the four-year license
term, which ends in June 2000. The royalty rate escalates over each of the four
years in the license period and is based on the total revenue of the licensee
attributable to the MYOB product line.
The Company currently derives substantially all of its revenue from its FAS
and Abra product lines and related services and from the MYOB License
(collectively, the "Ongoing Business"). The Company's historical consolidated
financial statements include results of operations relating to the Divested
Product Lines and the MYOB product line. Accordingly, the Company's historical
consolidated financial statements are not indicative of operating results
attributable to the Ongoing Business. For fiscal 1995, 1996 and 1997,
respectively, total revenue from the Ongoing Business was $26.2 million, $30.8
million and $38.4 million; gross margin for the Ongoing Business was $20.7
million, $23.8 million and $30.9 million; and operating income from the Ongoing
Business was $2.9 million, $2.0 million and $5.6 million. For the three month
periods ended June 30, 1996 and 1997, respectively, total revenue from the
Ongoing Business was $8.5 million and $10.6 million; gross margin for the
Ongoing Business was $6.7 million and $8.8 million; and operating income from
the Ongoing Business was $155,000 and $867,000.
Prior to fiscal 1994, substantially all of the Company's revenues from the
FAS and Abra product lines were derived from licenses of DOS-based versions of
these products. Since fiscal 1994, the Company has introduced Windows versions
of these products and, since fiscal 1995, a significant number of the Company's
DOS customers have migrated to the Company's Windows-based products.
Additionally, since the introduction of multi-user versions of its products in
fiscal 1995 and fiscal 1996, the Company has sold an increased number of
multi-user licenses of its FAS and Abra products. Upon
18
<PAGE> 20
the introduction of a new product or an enhanced version of an existing product,
the Company has typically derived significant license fee revenue from trade-ups
by existing customers. Typically, the license fees paid for trade-ups are lower
than the license fees for an initial license. In addition, the Windows-based
products and the multi-user products generally have higher average license fees
and gross margins than the DOS-based products.
In addition to revenue from product licenses, the Company derives
significant recurring revenue from maintenance and support agreements. In each
of fiscal 1996 and 1997, approximately 85% of the Company's customers purchased
maintenance and support agreements in connection with their initial license of
the Company's products. During each of the last two fiscal years, the Company
has achieved average annual renewal rates for its maintenance and support
agreements of approximately 80%. Under its maintenance and support agreements,
the Company provides technical support and periodic software updates. In late
fiscal 1997, the Company launched its consulting services, which include
installation, set-up and conversion services. Training and consulting revenue
are anticipated to have lower gross margins than revenue from maintenance and
support agreements. In fiscal 1997, approximately 50% of total revenue from the
Ongoing Business was attributable to services, of which a substantial portion
was derived from maintenance and support agreements. Maintenance and support
agreements are generally priced as a percentage of the initial license fee for
the underlying products.
The Company recognizes revenue on license fees upon shipment of the
product, net of provisions for returns and allowances, provided that no
significant Company obligations remain and that collection of the resulting
account receivable is probable. For products with free trial periods, revenue is
recognized upon acceptance of the product by the customer. Revenue from the MYOB
License is recognized ratably within each year of the term of the license
agreement, based on specified annual royalty payments. Revenue from maintenance
and support agreements is recognized pro rata over the term of the agreements,
which is generally one year. Revenue from other services, such as training and
consulting, is recognized as the services are provided.
The Company employs a multi-channel sales and marketing strategy utilizing
four primary channels: Business Partners, a direct-response telesales operation,
strategic marketing alliances and a direct sales organization. In 1995, the
Company began to develop its direct sales organization and has invested and
expects to continue to invest in the development of this channel. The Company
expects that sales through direct channels will generally have higher gross
margins than sales through indirect channels, although these higher margins may
be offset in whole or in part by increased sales and marketing expenses. In
addition, in October 1996, the Company established a wholly owned subsidiary in
Ontario, Canada to localize and market the Company's FAS and Abra products in
the Canadian market.
The Company has made, and intends to continue to make, significant
investments in research and development to develop new products and enhanced
client/server versions of its existing products. In addition, the Company
releases periodic updates of its products to incorporate regulatory changes. As
of June 30, 1997, the Company had 62 full-time software development personnel
with expertise in Windows, Windows NT, client/server and/or Internet
environments. Of these developers, five are Certified Public Accountants and
seven are Certified Payroll Professionals.
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standard No. 86 "Accounting For The Costs Of
Computer Software To Be Sold, Leased Or Otherwise Marketed." Costs incurred
prior to establishment of technological feasibility are expensed as incurred and
reflected as research and development costs. The Company capitalized software
development costs of $126,000 in fiscal 1995, all of which were fully amortized
by the end of fiscal 1996. There were no software development costs capitalized
in fiscal 1996 or 1997 or in the three-month period ended June 30, 1997. During
these periods, the time between the establishment of technological feasibility
and general release was very short. Costs otherwise capitalizable after
technological feasibility were insignificant and, therefore, were expensed as
incurred.
19
<PAGE> 21
In fiscal 1994, the Company established a valuation allowance for certain
deferred tax assets. The valuation allowance was subsequently reduced as a
result of the Company's analysis of then current levels of earnings and
anticipated operating results. As a result, the Company's effective tax rate has
been significantly lower than the applicable statutory rates. The Company
expects that the effective tax rate in future periods will more closely reflect
statutory rates.
OPERATING RESULTS
The following table sets forth for the periods indicated certain
consolidated statement of operations data expressed as a percentage of total
revenue. The Company's historical financial statements include operating results
relating to the Divested Product Lines and the MYOB product line and, therefore,
are not indicative of the results of operations attributable to the Ongoing
Business.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
MARCH 31, ENDED JUNE 30,
----------------------- --------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
License fees and royalty.............................. 58.1% 57.8% 51.1% 53.3% 50.3%
Services.............................................. 41.9 42.2 48.9 46.7 49.7
----- ----- ----- ----- -----
Total......................................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenue:
License fees and royalty.............................. 10.9 11.5 5.7 6.1 3.5
Services.............................................. 12.4 13.5 14.4 15.9 13.8
----- ----- ----- ----- -----
Total......................................... 23.3 25.0 20.1 22.0 17.3
----- ----- ----- ----- -----
Gross margin............................................ 76.7 75.0 79.9 78.0 82.7
----- ----- ----- ----- -----
Operating expenses:
Sales and marketing................................... 32.4 32.7 36.4 41.6 40.5
Research and development.............................. 16.3 18.8 15.4 19.1 19.2
General and administrative............................ 12.2 14.7 14.0 16.1 14.9
Amortization of acquired intangibles.................. 9.1 3.7 -- -- --
----- ----- ----- ----- -----
Total......................................... 70.0 69.9 65.8 76.8 74.6
----- ----- ----- ----- -----
Operating income........................................ 6.7 5.1 14.1 1.2 8.1
Other income (expense), net............................. (0.5) 1.5 0.9 0.1 (2.7)
----- ----- ----- ----- -----
Income from continuing operations before income taxes... 6.2 6.6 15.0 1.3 5.4
Income tax benefit (provision).......................... (1.6) 2.4 (3.8) (0.5) (2.1)
----- ----- ----- ----- -----
Income from continuing operations....................... 4.6 9.0 11.2 0.8 3.3
Gain on disposal of discontinued business............... 5.4 -- -- -- --
----- ----- ----- ----- -----
Net income.............................................. 10.0% 9.0% 11.2% 0.8% 3.3%
===== ===== ===== ===== =====
Gross Margins:
Gross margin on license fees and royalty revenue...... 81.3% 80.2% 88.8% 88.6% 93.1%
Gross margin on services revenue...................... 70.3% 67.9% 70.6% 65.9% 72.2%
</TABLE>
THREE MONTHS ENDED JUNE 30, 1996 AND 1997
License Fees and Royalty Revenue. License fees and royalty revenue
consists of fees from software licenses and royalties from the MYOB License.
License fees and royalty revenue increased from $5.1 million for the three
months ended June 30, 1996 to $5.4 million for the three months ended June 30,
1997, representing an increase of 5.8%. As a percentage of total revenue,
license fees and royalty revenue decreased from 53.3% to 50.3% for the
three-month periods ended June 30, 1996 and 1997, respectively. The dollar
increase in license fees and royalty revenue was due to a 23.4% increase
20
<PAGE> 22
in license fee revenue from FAS and Abra products, which resulted primarily from
increased sales of higher priced Windows-based and multi-user products, offset
in part by the elimination of license fees attributable to the MYOB product
line. During the three months ended June 30, 1997, the Company also received
royalty revenue of $221,000 from the MYOB License.
Services Revenue. Services revenue includes revenue from maintenance and
support agreements and training and consulting services. Services revenue
increased from $4.4 million for the three months ended June 30, 1996 to $5.3
million for the three months ended June 30, 1997, representing an increase of
19.3%. As a percentage of total revenue, services revenue increased from 46.7%
to 49.7% for the three months ended June 30, 1996 and 1997, respectively. The
dollar increase in services revenue was primarily due to an increase in the
number of maintenance and support agreements, which resulted from an increased
renewal rate and a larger installed base of customers, and a higher average
contract value resulting from increased sales of higher priced license products.
To a lesser extent, the increase in services revenue was due to the Company's
increased focus on offering training and other consulting services, which
include installation, set-up and data conversion activities. The increase in
services revenue as a percentage of total revenue was primarily attributable to
increased renewal rates and the elimination of revenue attributable to the MYOB
product line, whose customers purchased proportionately fewer services.
Cost of License Fees and Royalty Revenue. Cost of license fees and royalty
revenue consists primarily of the costs of media, product manuals, shipping and
fulfillment, and royalties paid to third parties. Cost of license fees and
royalty revenue decreased from $577,000 for the three months ended June 30, 1996
to $371,000 for the three months ended June 30, 1997, representing a decrease of
35.7%. As a percentage of license fees and royalty revenue, cost of license fees
and royalty revenue decreased from 11.4% to 6.9% for the three-month periods
ended June 30, 1996 and 1997, respectively. The decrease in cost of license fees
and royalty revenue as a percentage of license fees and royalty revenue was
primarily due to increased sales of higher margin Windows-based and multi-user
products and the elimination of license fees attributable to the lower margin
MYOB product line. To a lesser extent, the decrease was due to the $221,000 in
royalty revenue received under the MYOB License for the three months ended June
30, 1997, for which the associated costs were nominal.
Cost of Services Revenue. Cost of services revenue consists primarily of
personnel costs, telephone charges and other costs related to providing
telephone support, training and consulting services. Cost of services revenue
was $1.5 million for both of the three-month periods ended June 30, 1996 and
1997. As a percentage of services revenue, cost of services revenue decreased
from 34.1% to 27.8% for the three-month periods ended June 30, 1996 and 1997,
respectively. The decrease in cost of services revenue as a percentage of
services revenue was primarily due to the elimination of services related to the
MYOB product line, which historically had higher cost of services as a
percentage of services revenue than the Company's FAS and Abra product lines.
Sales and Marketing. Sales and marketing expenses consist primarily of
direct mail programs, advertising, other marketing programs, personnel costs,
commissions, travel and administrative costs. Sales and marketing expenses
increased from $4.0 million for the three months ended June 30, 1996, to $4.3
million for the three months ended June 30, 1997, representing an increase of
8.9%. As a percentage of total revenue, sales and marketing expenses decreased
from 41.6% to 40.5% for the three-month periods ended June 30, 1996 and 1997,
respectively. The dollar increase was primarily due to increased costs
associated with the Company's expanded 1997 Business Partner Conference, the
establishment of the Company's Canadian operations and increased lead
generation, advertising and corporate brand awareness activities. The decrease
in sales and marketing expenses as a percentage of total revenue was primarily
attributable to increased efficiencies in the Company's direct mail program.
Research and Development. Research and development expenses consist
primarily of personnel costs and fees paid to outside consultants. Research and
development expenses increased from $1.8 million for the three months ended June
30, 1996 to $2.0 million for the three months ended
21
<PAGE> 23
June 30, 1997, representing an increase of 12.7%. As a percentage of total
revenue, research and development expenses increased slightly from 19.1% to
19.2% for the three-month periods ended June 30, 1996 and 1997, respectively.
The dollar increase in research and development expenses was primarily the
result of increased expenses relating to the development of a new budgeting
product and, to a lesser extent, the expenses incurred to localize the Company's
FAS and Abra product lines for sale in Canada.
General and Administrative. General and administrative expenses include
the costs of corporate operations, finance and accounting, human resources and
other general operations. General and administrative expenses increased from
$1.5 million for the three months ended June 30, 1996 to $1.6 million for the
three months ended June 30, 1997, representing an increase of 4.0%. As a
percentage of total revenue, general and administrative expenses decreased from
16.1% to 14.9% for the three-month periods ended June 30, 1996 and 1997,
respectively. The dollar increase in general and administrative expenses was the
result of increased staffing and related expenses necessary to manage and
support the expansion of the Company's operations. Since general and
administrative expenses increased at a lower rate than total revenue, such
expenses decreased as a percentage of total revenue.
Other Income (Expense), Net. Other income (expense), net was $11,000 for
the three months ended June 30, 1996 and $(293,000) for the three months ended
June 30, 1997. Interest expense for the three months ended June 30, 1997 was
primarily due to $520,000 of interest expense attributable to a payment of
$432,000 to a warrant holder, and the related reduction in the exercise price of
the warrant, in connection with the June 1997 dividend to shareholders, offset
in part by increased interest income. See "Certain Transactions."
Provision for Income Taxes. The provision for income taxes was $45,000 for
the three months ended June 30, 1996 and $225,000 for the three months ended
June 30, 1997, representing 36.1% and 39.2% of income before taxes,
respectively.
FISCAL 1995, 1996 AND 1997
License Fees and Royalty Revenue. License fees and royalty revenue
increased from $20.3 million in fiscal 1995 to $22.7 million in fiscal 1996, and
decreased to $20.2 million in fiscal 1997, representing an increase of 11.5% and
a decrease of 11.1%, respectively. As a percentage of total revenue, license
fees and royalty revenue decreased from 58.1% to 57.8% and to 51.1% for fiscal
1995, 1996 and 1997, respectively.
The dollar increase from fiscal 1995 to fiscal 1996 was the result of an
increase in license fee revenue from FAS and Abra products, which was partially
offset by the decline in license fee revenue attributable to the Company's
service bureau and write-up product lines, which were sold in August 1995. The
dollar decrease from fiscal 1996 to fiscal 1997 was the result of the
elimination of license fees from the MYOB product line, which more than offset
an increase in license fee revenue for FAS and Abra products. The decrease as a
percentage of total revenue from fiscal 1996 to fiscal 1997 was the result of
the elimination of license fees from the MYOB product line, which generated
higher license fees as a percentage of total revenue than the FAS and Abra
product lines. During fiscal 1997, the Company recorded royalty revenue of
$664,000 from the MYOB License.
Services Revenue. Services revenue increased from $14.7 million in fiscal
1995 to $16.6 million in fiscal 1996 and to $19.3 million in fiscal 1997,
representing increases of 12.8% and 16.7%, respectively. As a percentage of
total revenue, services revenue increased from 41.9% to 42.2% and to 48.9% for
fiscal 1995, 1996 and 1997, respectively. The dollar increases in services
revenue was primarily due to the increase in maintenance and support agreements,
which resulted from an increased renewal rate and a larger installed base of
customers, and higher average contract value. To a lesser extent, the increase
in services revenue was due to the Company's increased focus on providing
training services and, with respect to the increase from fiscal 1996 to fiscal
1997, other consulting services. The increase in services revenue as a
percentage of total revenue from fiscal 1996 to fiscal 1997 was primarily
22
<PAGE> 24
attributable to increased renewal rates and the elimination of revenue
attributable to the MYOB product line, whose customers purchased proportionately
fewer services.
Cost of License Fees and Royalty Revenue. Cost of license fees and royalty
revenue increased from $3.8 million in fiscal 1995 to $4.5 million in fiscal
1996 and decreased to $2.3 million in fiscal 1997, representing an 18.3%
increase and a 50.0% decrease, respectively. As a percentage of license fees and
royalty revenue, cost of license fees and royalty revenue changed from 18.7% to
19.8% and to 11.2% for fiscal 1995, 1996 and 1997, respectively.
The dollar increase from fiscal 1995 to fiscal 1996 was primarily due to an
increase in the number of units shipped in fiscal 1996. The increase as a
percentage of license fees and royalty revenue from fiscal 1995 to fiscal 1996
was primarily attributable to royalties paid by the Company to a third-party
developer with respect to license fees received by the Company for its FASTrack
product, offset in part by the elimination of license fees from the write-up
product line, which had higher packaging and shipping costs than the FAS and
Abra products lines.
The decrease in cost of license fees and royalty revenue from fiscal 1996
to fiscal 1997 was primarily due to the elimination of costs associated with the
MYOB product line, the elimination of $1.2 million of amortization of
capitalized software development costs recorded in each of fiscal 1995 and
fiscal 1996 and, to a lesser extent, a change in the media on which the
Company's products were delivered from diskettes to lower cost CD-ROMs. The
decrease as a percentage of license fees and royalty revenue from fiscal 1996 to
fiscal 1997 was primarily due to the elimination of the MYOB product line, which
had a lower margin than the Company's FAS and Abra products, to $664,000 of
royalty revenue from the MYOB License in fiscal 1997, for which the associated
costs are nominal, and to the change to CD-ROM media.
Cost of Services Revenue. Cost of services revenue increased from $4.4
million in fiscal 1995 to $5.3 million in fiscal 1996 and to $5.7 million in
fiscal 1997, representing increases of 21.8% and 7.0%, respectively. As a
percentage of services revenue, cost of services revenue changed from 29.7% to
32.1% and to 29.4% for fiscal 1995, 1996 and 1997, respectively. The dollar
increases in cost of services revenue were attributable primarily to costs
associated with additional personnel to meet the demands of the increased number
of maintenance and support customers and, to a lesser extent, to costs
associated with enhancing customer support systems, offset in part in fiscal
1997 by the elimination of costs associated with providing services for the MYOB
product line. The decrease in cost of services revenue as a percentage of
services revenue in fiscal 1997 was due to the elimination of services related
to the MYOB product line, which historically had higher cost of services as a
percentage of services revenue than the Company's FAS and Abra product lines.
Sales and Marketing. Sales and marketing expense increased from $11.4
million in fiscal 1995 to $12.8 million in fiscal 1996 and to $14.4 million in
fiscal 1997, representing increases of 12.8% and 12.0%, respectively. As a
percentage of total revenue, sales and marketing expenses increased from 32.4%
to 32.7% and to 36.4% for fiscal 1995, 1996 and 1997, respectively. The
increases in sales and marketing expenses in each period were primarily due to
the hiring of additional sales and marketing personnel and, to a lesser extent,
increased lead generation, advertising and corporate brand awareness activities.
Research and Development. Research and development expenses increased from
$5.7 million in fiscal 1995 to $7.4 million in fiscal 1996 and decreased to $6.1
million in fiscal 1997, representing an increase of 29.5% and a decrease of
17.6%, respectively. As a percentage of total revenue, research and development
expenses changed from 16.3% to 18.8% and to 15.4% for fiscal 1995, 1996 and
1997, respectively. The increase in research and development expenses from
fiscal 1995 to fiscal 1996, and the decrease from fiscal 1996 to fiscal 1997,
were primarily due to expenses in fiscal 1996 relating to the updating of
product lines to include Windows-based versions and enhanced multi-user versions
and nonrecurring development expenses associated with the MYOB product line.
General and Administrative. General and administrative expenses increased
from $4.3 million in fiscal 1995 to $5.8 million in fiscal 1996 and decreased to
$5.6 million in fiscal 1997, representing an
23
<PAGE> 25
increase of 35.1% and a decrease of 4.1%, respectively. As a percentage of total
revenue, general and administrative expenses changed from 12.2% to 14.7% and to
14.0% for fiscal 1995, 1996 and 1997, respectively. The increase in general and
administrative expenses in fiscal 1996 related to the Company's continued
development of its management infrastructure, including the addition of
personnel to support growth in the Company's operations and the hiring of its
current Chief Executive Officer. The decrease in general and administrative
expenses for fiscal 1997 was due primarily to the reduction in general and
administrative expenses associated with the MYOB product line.
Amortization of Acquired Intangibles. Amortization of acquired intangibles
relates to costs capitalized as a result of various acquisitions. Amortization
of acquired intangibles was $3.2 million in fiscal 1995 and $1.4 million in
fiscal 1996. Capitalized costs for intellectual property rights and other
intangibles were fully amortized as of the end of fiscal 1996.
Other Income (Expense), Net. Other income (expense), net was $(176,000)
for fiscal 1995, $605,000 for fiscal 1996 and $351,000 for fiscal 1997. Interest
expense for fiscal 1997 was primarily due to $215,000 of interest expense
attributable to a reduction in the exercise price of a warrant in connection
with the February 1997 dividend to shareholders, offset in part by increased
interest income. See "Certain Transactions."
(Provision) Benefit for Income Taxes: The (provision) benefit for income
taxes was $(550,000), $925,000 and $(1.5 million) for fiscal 1995, 1996 and
1997, representing (25.0)%, 35.5% and (25.0)% of income before taxes,
respectively. For fiscal 1995, the difference between the expected tax provision
based on Federal statutory rates and the effective tax rate resulted principally
from the utilization of a net operating loss carryforward. For fiscal 1996 and
1997, the difference between the expected tax provision based on Federal
statutory rates and the effective tax rate resulted principally from tax
benefits relating to a reduction of the valuation allowance against the
Company's deferred tax asset of $2.0 million and $1.2 million in 1996 and 1997,
respectively, based on management's analysis of current levels of earnings and
anticipated operating results. The Company expects that the income tax provision
in future periods will more closely reflect the statutory tax rates. See Note 6
of Notes to Consolidated Financial Statements.
24
<PAGE> 26
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth for the last nine quarters (i) certain
consolidated statement of operations data and (ii) certain consolidated
statement of operations data expressed as a percentage of total revenue. In
management's opinion, the unaudited quarterly consolidated statement of
operations data has been prepared on the same basis as the audited consolidated
financial statements and includes all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the information for
the quarters presented, when read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. The Company
believes that quarter-to-quarter comparisons of its operating results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1996 1996 1996 1996 1997 1997
--------- --------- -------- ---------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License fees and
royalty.............. $ 4,381 $ 4,720 $ 6,230 $ 7,346 $ 5,064 $ 4,603 $ 5,504 $ 4,990 $ 5,358
Services............... 3,922 3,835 4,383 4,412 4,435 4,688 5,024 5,176 5,288
------ ------ ------ ------ ------ ------ ------ ------ ------
Total............ 8,303 8,555 10,613 11,758 9,499 9,291 10,528 10,166 10,646
------ ------ ------ ------ ------ ------ ------ ------ ------
Cost of revenue:
License fees and
royalty.............. 675 735 1,267 1,824 577 362 509 803 371
Services............... 1,255 1,171 1,397 1,483 1,514 1,241 1,355 1,565 1,470
------ ------ ------ ------ ------ ------ ------ ------ ------
Total............ 1,930 1,906 2,664 3,307 2,091 1,603 1,864 2,368 1,841
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross margin............ 6,373 6,649 7,949 8,451 7,408 7,688 8,664 7,798 8,805
Operating expenses:
Sales and marketing.... 3,035 3,054 3,455 3,268 3,954 2,999 3,858 3,544 4,305
Research and
development.......... 1,817 2,036 1,964 1,572 1,817 1,464 1,470 1,338 2,048
General and
administrative....... 1,473 1,465 1,436 1,415 1,523 1,250 1,389 1,392 1,585
Amortization of
acquired
intangibles.......... 345 328 289 473 -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total............ 6,670 6,883 7,144 6,728 7,294 5,713 6,717 6,274 7,938
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)................. (297) (234) 805 1,723 114 1,975 1,947 1,524 867
Other income (expense),
net.................... (65) 619 52 (1) 11 87 128 125 (293)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... (362) 385 857 1,722 125 2,062 2,075 1,649 574
Income tax benefit
(provision)............ 145 (155) (345) 1,280 (45) (940) (945) 455 (225)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ (217) $ 230 $ 512 $ 3,002 $ 80 $ 1,122 $ 1,130 $ 2,104 $ 349
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1996 1996 1996 1996 1997 1997
--------- --------- -------- ---------- --------- --------- -------- --------- --------
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License fees and
royalty.............. 52.8% 55.2% 58.7 % 62.5% 53.3% 49.5% 52.3 % 49.1% 50.3 %
Services............... 47.2 44.8 41.3 37.5 46.7 50.5 47.7 50.9 49.7
--------- --------- -------- ---------- --------- --------- -------- --------- --------
Total............ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
--------- --------- -------- ---------- --------- --------- -------- --------- --------
Cost of revenue:
License fees and
royalty.............. 8.1 8.6 11.9 15.5 6.1 3.9 4.8 7.9 3.5
Services............... 15.1 13.7 13.2 12.6 15.9 13.4 12.9 15.4 13.8
--------- --------- -------- ---------- --------- --------- -------- --------- --------
Total............ 23.2 22.3 25.1 28.1 22.0 17.3 17.7 23.3 17.3
--------- --------- -------- ---------- --------- --------- -------- --------- --------
Gross margin............ 76.8 77.7 74.9 71.9 78.0 82.7 82.3 76.7 82.7
--------- --------- -------- ---------- --------- --------- -------- --------- --------
Operating expenses:
Sales and marketing.... 36.6 35.7 32.6 27.8 41.6 32.3 36.7 34.9 40.5
Research and
development.......... 21.9 23.8 18.5 13.4 19.1 15.8 14.0 13.2 19.2
General and
administrative....... 17.7 17.1 13.5 12.0 16.1 13.3 13.1 13.6 14.9
Amortization of
acquired
intangibles.......... 4.2 3.8 2.7 4.0 -- -- -- -- --
--------- --------- -------- ---------- --------- --------- -------- --------- --------
Total............ 80.4 80.4 67.3 57.2 76.8 61.4 63.8 61.7 74.6
--------- --------- -------- ---------- --------- --------- -------- --------- --------
Operating income
(loss)................. (3.6) (2.7) 7.6 14.7 1.2 21.3 18.5 15.0 8.1
Other income (expense),
net.................... (0.8) 7.2 0.5 0.0 0.1 0.9 1.2 1.2 (2.7)
--------- --------- -------- ---------- --------- --------- -------- --------- --------
Income (loss) from
continuing operations
before income taxes.... (4.4) 4.5 8.1 14.7 1.3 22.2 19.7 16.2 5.4
Income tax benefit
(provision)............ 1.8 (1.8) (3.3) 10.8 (0.5) (10.1) (9.0) 4.5 (2.1)
--------- --------- -------- ---------- --------- --------- -------- --------- --------
Net income (loss)....... (2.6)% 2.7% 4.8 % 25.5% 0.8% 12.1% 10.7 % 20.7% 3.3 %
=========== ========== ========== ============= =========== ========== ========== ============ ==========
</TABLE>
The Company has experienced, and expects to continue to experience,
significant fluctuations in its quarterly operating results. There can be no
assurance that the Company will be profitable in any particular quarter. The
Company's future quarterly operating results will depend upon a number of
factors, including the demand for its products, the type and level of services
purchased by its customers, the mix of sales through direct and indirect sales
channels, the level of product and price competition that it encounters, the
length of its sales cycles, the timing of larger customer implementations, the
timing and success of sales and marketing programs, particularly direct mail
campaigns, the timing and acceptance of new product introductions and product
enhancements by the Company and its competitors, the timing and amount of the
Company's product development programs, the mix of products and services sold,
the timing of new hires, market acceptance of new products, competitive
conditions in the industry and general economic conditions. The Company's
expense levels are based, in significant part, on anticipated revenue trends.
Because a high percentage of these expenses are relatively fixed in the short
term, if revenue levels fall below expectations, the Company's operating results
are likely to be materially and adversely affected. Historically, the Company's
revenues and earnings for the first calendar quarter have been lower than those
for the preceding quarter because a disproportionate number of customers
purchase the Company's products in the fourth calendar quarter in anticipation
of the close of their own fiscal years and the ensuing tax season. In addition,
margins in the first calendar quarter have historically been lower due to the
shipment by the Company of large numbers of annual software updates in that
quarter, reflecting regulatory changes. The Company anticipates that the sales
cycle for its enhanced client/server products, upon their introduction, will
generally be longer than that associated with its current products. Any
lengthening of the Company's sales cycle could have a material adverse effect on
the Company's business, operating results and financial condition and, in
particular, could contribute to significant fluctuations in operating results on
a quarterly basis. As a result of these and other factors, the Company's
quarterly operating results in future quarters are subject to variation, and the
Company believes that quarter-to-quarter comparisons of its operating results
are not necessarily meaningful and should not be relied upon as an indication of
future performance. In addition, due to all the foregoing factors, the Company's
operating results in future periods may be below the expectations of securities
analysts and investors. In that event, the market price of the Company's Common
Stock would likely be materially adversely affected.
26
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations through cash provided by operations. The
Company had cash and cash equivalents of $7.4 million at June 30, 1997.
For fiscal 1997 and the three months ended June 30, 1997, net cash provided
by operating activities was $12.3 million and $2.3 million, respectively. In
fiscal 1997, net cash provided by operating activities consisted primarily of
net income, deferred maintenance and services revenue and increased collections
of accounts receivable. In the three months ended June 30, 1997, cash provided
by operating activities consisted primarily of net income, deferred maintenance
and services revenue, offset by an increased accounts receivable balance and by
an increase in prepaid expenses. As a result of the licensing of the Company's
MYOB product line in May 1996, the Company's inventory and accounts receivable
have generally decreased in relation to total revenue. The MYOB product line was
typically sold through a retail distribution channel that necessitated higher
levels of inventory to support a lower revenue base and generally had longer
payment terms than are typically extended to customers for the Company's other
product lines. Consequently, accounts receivable and inventory decreased from
fiscal 1996 to fiscal 1997, notwithstanding the increase in the Company's
revenue. The Company's accounts receivable increased from March 31, 1997 to June
30, 1997, principally due to increased revenues in the month of June.
The Company, on a monthly basis, makes an overall assessment of the
required allowance for uncollectible accounts, product returns and credits.
Historically, additions to the allowance have primarily been made for estimated
product returns and credits, which are recorded as a reduction of revenue. The
allowance for uncollectible accounts increased at the end of fiscal 1996 as a
result of the release of a new MYOB product version late in that fiscal year.
The MYOB product line was subsequently licensed in fiscal 1997 and actual
related returns and credits were charged against the previously established
allowance. For the three months ended June 30, 1997, the Company's allowance for
uncollectible accounts was increased principally as a result of the approximate
$1.8 million increase in accounts receivable from the end of the previous
quarter. The Company's allowance for uncollectible accounts as a percentage of
gross accounts receivable was 27.2%, 28.2% and 28.3% as of the end of fiscal
1996, fiscal 1997 and June 30, 1997, respectively.
Net cash used in investing activities for fiscal 1997 and for the three
months ended June 30, 1997 was $1.1 million and $150,000, respectively. In both
periods, net cash used in investing activities was used primarily for the
purchase of property and equipment. Although the Company does not currently have
any material identifiable commitments for capital expenditures, the Company
expects to continue to invest in the acquisition of property and equipment in
the ordinary course of its business. The Company does not have any material
commitments related to its royalty obligations arising from licenses of certain
products and technologies used in the Company's products.
Net cash used in financing activities for fiscal 1997 and the three months
ended June 30, 1997 was $5.9 million and $8.1 million, respectively. During
fiscal 1997, the principal use of cash was the payment of a dividend and the
repayment of a note. During the three months ended June 30, 1997, the principal
use of cash was the payment of dividends totaling $7.6 million.
The Company believes that the net proceeds from this offering and cash
generated from operations will be sufficient to fund its operations for at least
the next 12 months.
27
<PAGE> 29
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants approved for
exposure a draft Statement of Position that would supersede Statement of
Position 91-1, Software Revenue Recognition. If approved, the new Statement of
Position would have to be implemented for fiscal years beginning after December
15, 1997. The Company believes that the proposed changes would not have a
material financial impact on the Company.
In March 1997, the Financial Accounting Board issued Statement No. 128,
"Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 is effective for financial
statements issued after December 15, 1997. Under SFAS No. 128, the presentation
of primary earnings per share is replaced with basic earnings per share. See
Note 1 of Notes to Consolidated Financial Statements.
28
<PAGE> 30
BUSINESS
The Company is a leading provider of asset, human resources and payroll
management software solutions for middle market businesses. The Company's
feature-rich, cost-effective solutions are easy to implement and enhance
productivity by automating management, compliance and reporting functions in
areas of specialized expertise that entail complex and frequently changing laws
and regulations. The Company's solutions have been designed to complement core
accounting systems and are scaleable from stand-alone desktop applications
running on personal computers to multi-user work group and client/server
programs designed for use on personal computer local area networks. As of June
30, 1997, the Company had over 40,000 licensed customer locations, representing
approximately 115,000 licensed seats. In addition to revenue from product
licenses, the Company derives significant recurring revenue from maintenance and
support agreements. The Company reaches its large customer base and target
market through a multi-channel sales and marketing strategy that includes its
network of value-added resellers, accounting firms and consultants ("Business
Partners"), a direct-response telesales operation, strategic marketing alliances
and a direct sales organization.
INDUSTRY BACKGROUND
Increased competitive pressures and rapidly changing market conditions are
continually challenging businesses of all sizes to enhance profitability by
improving operating efficiencies and implementing better cost controls.
Businesses are increasingly relying on technological advancements to achieve
these goals. In particular, businesses are utilizing the wide availability of
affordable computing solutions to automate many of their core accounting and
operational functions. As a result, many businesses are dedicating substantial
resources to automating and streamlining the processes associated with several
key functions, including asset, human resources and payroll management.
Automating and streamlining these functions results in improved efficiencies
from better utilization of assets, a reduction in associated losses and expenses
(including insurance and taxes) and more precise accounting and reporting. In
the human resources area, businesses can achieve efficiencies by streamlining
the input and management of personnel and payroll information and by providing
improved access to such information across the organization.
Effective management of asset, human resources and payroll functions
requires highly specialized expertise and the ability to remain abreast of
frequently changing regulatory requirements. In the asset management area, these
include complex tax and accounting regulations governing the application of
numerous depreciation calculations, as well as a variety of regulatory
requirements that affect many aspects of a business' asset management function.
Compliance with these regulations requires comprehensive tracking of fixed
assets, compilation of detailed historical data and accurate, timely reporting.
Similarly, the efficient utilization of human resources information and
compliance with various laws and regulations, such as equal employment
opportunity laws and the Americans with Disabilities Act, requires human
resources managers to accurately compile, retain and report large amounts of
personnel data and statistics. These include information on hiring and
recruitment, training, evaluation and promotion of employees. In addition, under
Federal and state tax regulations employers must implement frequently changing
withholding taxes and other payroll taxes for employees and must accurately
report such payments to tax authorities.
Core accounting software generally does not provide adequate management,
compliance and reporting functions in areas of specialized expertise, such as
asset, human resources and payroll management. As a result, many businesses are
relegated to the use of less than optimal solutions such as spreadsheet-based
techniques and manual processes, which can be time-consuming and inaccurate,
mainframe or minicomputer-based solutions or in-house software development,
which are often expensive and can be difficult to implement, or third-party
outsourcing, which can be inflexible and expensive and over which the customer
has limited control.
The Company believes that the need for asset, human resources and payroll
management software solutions is particularly acute in the middle market, which
generally consists of businesses with
29
<PAGE> 31
$1 million to $250 million in revenues and ten to 2,500 employees. Although many
middle market businesses have formal information technology ("IT") departments,
such businesses generally have fewer IT resources than larger companies. Middle
market businesses are also less likely to have dedicated, in-house personnel
with specialized substantive expertise in asset, human resources and payroll
management. In addition, the middle market is characterized by changing software
technologies as businesses take advantage of developments in technology to
increase competitiveness. While many middle market businesses perform accounting
and other financial management functions on stand-alone personal computers or
multi-user networks that support Windows NT and/or Novell environments,
increasingly these businesses have begun to adopt client/server architectures,
such as those based on Microsoft SQL Server. For all of these reasons, middle
market businesses require highly functional, cost-effective software solutions
that can be easily and rapidly implemented, are easy to learn and use, can scale
to accommodate evolving software technology preferences and are reinforced by an
extensive support capability.
THE BEST SOLUTION
The Company is a leading provider of asset, human resources and payroll
management software solutions. The Company's FAS and Abra product lines provide
comprehensive functionality in a cost-effective and easy-to-implement manner and
integrate with many leading core accounting systems. Numerous accounting firms,
including four of the Big Six, use the Company's solutions internally and the
Company regularly receives customer referrals from offices of the Big Six and
other accounting firms. The Company has formal and informal marketing alliances
with approximately 20 core accounting and other industry-specific software
vendors, including Great Plains Software, Inc., Platinum Software Corporation,
Scala North America, Inc. and State of the Art, Inc.
The Company's solutions are designed to offer the following benefits to its
customers:
Comprehensive Functionality. The Company's software solutions are designed
to provide comprehensive functionality for asset, human resources and payroll
management and are tailored to the needs of middle market businesses. Specific
features of the Company's products include sophisticated depreciation
calculations, extensive management capabilities, tax reporting, tax form
preparation, payroll processing, employee tracking and employee cost and
productivity analyses. As a result, the Company's customers are able to manage
assets, human resources and payroll more efficiently across their organizations.
Cost-Effective and Easy to Implement and Use. The Company designs its
products to provide, at prices affordable to middle market businesses, a feature
set competitive with much higher priced software solutions. The Company believes
its solutions offer performance features more typical of those provided by
higher-priced mainframe and minicomputer systems or third-party service
providers. Because middle market businesses typically have limited IT resources,
the Company also designs its products, which are based on the Windows interface
standard, to be easy to install, implement and use. Typically, the Company's
solutions can be installed in a matter of hours.
Highly Specialized Expertise. The Company employs 12 Certified Public
Accountants and 12 Certified Payroll Professionals in the sales and marketing,
research and development and technical support and services functions and has
gained significant expertise over more than a decade in the development of
asset, human resources and payroll management solutions. The Company believes
this highly specialized expertise gives it the ability to assess and anticipate
customer needs and to develop the functionalities required by its customers.
This expertise allows the Company to update program content regularly as
required to accommodate legislative and regulatory developments.
Improved Efficiency and Reduced Costs. The Company believes that its
solutions provide significant cost savings opportunities for its customers
through improved productivity and control. By facilitating asset management, the
Company's FAS product line permits customers to improve the efficiency of asset
tracking and control, depreciation calculation, report generation and tax return
preparation to reduce losses and expenses (such as insurance and taxes) and to
ensure precise
30
<PAGE> 32
accounting and reporting of fixed assets. The Company's Abra product line
automates the tracking of employee and benefit information, recruiting and
training, thereby significantly reducing the time required to complete these
functions. In addition, by allowing its customers to bring their payroll
functions in-house, the Company's Abra Payroll for Windows product reduces or
eliminates reliance on expensive third-party service providers, thereby
increasing the customer's control of the payroll process.
Extensive Service and Support. Due to the sophisticated tax, accounting
and regulatory content of its products, the Company offers extensive substantive
technical support and training to its customers. The Company supports its FAS
and Abra product lines through its SupportPlus program which provides customers
with software updates and unlimited telephone support by the Company's technical
support staff. The Company fielded over 270,000 telephone technical support
inquiries in fiscal 1997, many of which involved questions concerning asset,
human resources or payroll management, and provides frequent seminars on topics
ranging from basic operation to advanced technical subjects. The Company also
provides systems integration and implementation support both directly and
through its Business Partners and uses its Web sites for dissemination of
product information, technical support and feedback from customers and Business
Partners.
Compatibility with Leading Technologies and Leading Core Accounting
Solutions. The Company has focused on maintaining the compatibility of its
products with leading technologies. In particular, the Company's products are
optimized to operate with Microsoft technologies. The Company's products support
Microsoft operating systems, including Windows 95 and Windows NT. New products
are presently being developed to utilize many of the technologies found in the
Microsoft BackOffice suite, including SQL Server, Internet Information Server,
Active Server, Front Page and Visual Basic 5.0. The Company believes that the
use of these industry-standard development tools and technologies reflects the
current market preferences of its customers. The Company intends to continue to
develop solutions that will be compatible with future developments in Microsoft
technology. The Company also designs its products to integrate with many leading
third-party core accounting software solutions.
STRATEGY
The Company's objective is to extend its leadership position in the asset,
human resources and payroll management software solutions market and to develop
a range of other specialized and complementary solutions in order to provide its
customers with an integrated suite of products. The Company believes that by
supplying such solutions, it can serve as a single vendor offering customers
benefits such as bundled price incentives and comprehensive support, while
increasing its per customer average sales prices. The Company's strategy
incorporates the following key elements:
Offer Wide Range of Solutions. The Company seeks to position itself with
senior middle market decision makers as a "one stop" provider of software
solutions that complement its customers' core accounting systems. To further
this strategy, the Company intends not only to provide additional products in
the asset, human resources and payroll areas for existing or developing
technology platforms, but also to expand its product offerings by developing,
sublicensing and/or acquiring new products. For example, the Company is
currently developing a new software product designed to automate the corporate
budgeting process and a recruiting tool enabling customers to place help-wanted
advertisements on most major Web employment bulletin boards.
Leverage Specialized Expertise. The Company intends to continue to
leverage its specialized expertise in the asset, human resources and payroll
management areas to provide comprehensive software solutions to its customers.
The Company believes its in-depth understanding of complex and frequently
changing regulatory requirements and its knowledge of specialized customer
requirements differentiate it from competitors and provide a significant
advantage as it competes for middle market customers. The Company has formal and
informal marketing alliances with approximately 20 core accounting and other
industry-specific software vendors who, in order to enhance the versatility of
31
<PAGE> 33
their own systems, offer one or more of the Company's products as an integrated
application or add- on module for their own products. A number of these vendors
have elected to discontinue their own development of competing products and to
rely instead on the Company's specialized expertise as a developer of asset,
human resources and payroll management solutions.
Leverage Large Existing Customer Base. The Company believes that its large
existing customer base of over 40,000 licensed customer locations represents a
significant potential market for future sales of its products. The Company seeks
to leverage its strong market position by selling its new products to existing
customers and cross-selling its products to multiple offices, divisions and
departments of a customer's organization. The Company's customer base represents
a growth opportunity as those customers who are currently using the Company's
desktop and work group solutions migrate from DOS to Windows environments and
from individual or networked personal computers to client/server environments.
Employ Multi-Channel Sales and Marketing. The Company intends to continue
to employ a variety of sales and marketing channels, including its network of
Business Partners, a direct-response telesales operation, strategic marketing
alliances and its direct sales organization. The Company believes this diversity
of sales and marketing channels permits it to distribute its products to target
markets in the most efficient and effective manner, while reducing reliance on
any single channel. The Company has begun marketing certain of its products in
Canada and intends to expand international distribution of its products as they
are adapted for local requirements in other countries.
Provide Comprehensive Customer Service and Support. The Company intends to
continue to place emphasis on providing quality service and technical support to
its customers. The Company believes that offering comprehensive service and
support is important to customer satisfaction and provides a significant
opportunity for the Company to differentiate itself from competitors. The
Company expects to continue to derive a significant portion of its revenue from
technical support and from training and consulting services. The Company has
recently established a consulting services team to perform installation and
customization services for large national customers.
Extend Solutions to Emerging Technology Platforms. The Company's design
strategy is to make its solutions available on a variety of platforms to meet
its customers' evolving needs as they adopt new technologies. For example, in
response to customers' migration to 32-bit client/server architectures, the
Company has begun development of enhanced client/server versions of its
products. Employing technologies found in Microsoft BackOffice, including SQL
Server, Internet Information Server, Active Server, Front Page and Visual Basic
5.0, as well as ActiveX development tools, the Company believes the introduction
of its enhanced client/server products will enable it to address the growing
demand for the extension of its applications throughout the enterprise.
The Company believes that its large existing customer base of over 40,000
licensed customer locations represents a significant potential market for such
products. The Company seeks to leverage its strong market position by selling
these new products to existing customers.
32
<PAGE> 34
PRODUCTS
The Company's FAS and Abra product lines consist of a suite of desktop and
work group solutions that provide middle market customers with cost-effective
and feature-rich tools that comprehensively address their asset, human resources
and payroll management needs. The Company's products operate on the Microsoft
Windows operating system and employ an easy-to-use graphical user interface. The
Company's products are designed to be easy to implement and typically can be
installed in a matter of hours. The following table provides selected
information relating to the Company's FAS and Abra product lines:
<TABLE>
<CAPTION>
FAS ASSET MANAGEMENT SOLUTIONS
CURRENT VERSION CURRENT LIST
PRODUCT RELEASE DATE PRICE(1) PRODUCT DESCRIPTION
<S> <C> <C> <C>
FAS for Windows April 1997 $2,795 Fixed asset management and
depreciation
FAS Encore April 1997 $3,995 Fixed asset management and
depreciation with enhanced
functionality
FASTrack February 1997 $3,795 Asset tracking and management
for use with bar code readers
<CAPTION>
ABRA HUMAN RESOURCES AND PAYROLL MANAGEMENT SOLUTIONS
CURRENT VERSION CURRENT LIST
PRODUCT RELEASE DATE PRICE(1) PRODUCT DESCRIPTION
<S> <C> <C> <C>
Abra HR for Windows April 1997 $4,690 Human resources management and
employee data tracking
Abra Payroll for Windows April 1997 $5,490 In-house payroll processing
Abra Attendance for Windows November 1996 $2,490 Employee attendance tracking
Abra Applicant for Windows April 1997 $3,890 Job applicant tracking
Abra Recruiting Solution April 1997 $7,590 Employee recruiting and
applicant resume management
Abra Train for Windows April 1997 $2,790 Employee training management
Abra People Manager August 1996 $495 Human resources management for
smaller businesses
</TABLE>
(1) Prices shown are based on typical configurations (three network seats for
the FAS products; five seats for all Abra products except Abra People
Manager; one user for Abra People Manager).
33
<PAGE> 35
FAS ASSET MANAGEMENT PRODUCTS
The Company's FAS asset management products automate and streamline the
complex and tedious processes necessary to accurately and reliably track and
account for assets, including sophisticated depreciation calculations;
maintaining detailed historical data on, as well as tracking the location of,
assets across the enterprise; maintaining accurate audit trails; and preparing
management and tax reports and forms on demand. The Company's FAS products are
highly versatile and are designed to meet the customer's specific asset
management needs. These products can be integrated with many core accounting
systems and are offered separately or in integrated suites. The Company supports
its FAS products through the FAS SupportPlus membership program, which provides
customers with all software updates and unlimited telephone support by the
Company's technical support staff.
In fiscal 1997, the Company derived approximately 57% of its total revenue
from its FAS product line, including software licenses and related maintenance
and support agreements and training services, for both the current Windows
products and the previous generation of DOS products. As of June 30, 1997, the
Company had over 28,000 licensed FAS customer locations, and had approximately
23,000 active FAS SupportPlus maintenance and support agreements.
FAS for Windows and FAS Encore extend the functionality of core accounting
systems by enabling managers to monitor, in real-time, the acquisition,
transfer, depreciation and retirement of fixed assets, calculate depreciation
for book and tax purposes, and track assets for maintenance and insurance
purposes. FAS for Windows maintains a database of extensive information on each
asset and prepares comprehensive management reports and tax reports and forms.
FAS for Windows is designed to calculate asset depreciation using seven standard
depreciation methods without any customization and may easily be customized for
additional methodologies. FAS Encore is designed for businesses that require
more rigorous asset management. FAS Encore extends the functionality of FAS for
Windows with additional features such as automatic transfers and partial
disposals of assets; batch reporting of asset status and activity; password
security; and a built-in Crystal Reports-based report writer for creating
customized reports and presentation graphics. Certain of the features included
in FAS Encore are also available as add-on options for FAS for Windows.
FASTrack is a comprehensive asset tracking solution which utilizes
third-party bar code scanning and imaging technologies that enable the Company's
customers to maintain complete and accurate physical inventories of assets
across the enterprise and to track the location of mobile assets, conduct and
reconcile physical inventories and automatically update all asset records
quickly and easily in order to prevent loss of assets and the inefficiencies
associated with inaccurate depreciation calculations based on obsolete
inventories. FASTrack can be used on a stand-alone basis or can be seamlessly
integrated with both FAS for Windows and FAS Encore.
The Company's current FAS products are 16-bit Windows programs written in
C++ that are compatible with the Windows 3.x, Windows 95 and Windows NT
environments. These products operate with an SQL-standard database. FASTrack
supports multiple bar code readers, including those from Intermec Corporation
and Symbol Technologies, Inc., along with a wide range of bar code labels.
ABRA HUMAN RESOURCES AND PAYROLL MANAGEMENT PRODUCTS
The Company's Abra human resources and payroll management products provide
a comprehensive solution for the management of the human resources functions.
The Company's Abra human resources products integrate human resource, payroll,
recruitment and training data into a single database. As a result, the Company's
Abra products enable businesses to more quickly and easily access and update
employee data, current job and pay information, job and pay history, salary and
performance reviews, employee benefits data, workers' compensation information,
and education and training data. These products can be integrated with many core
accounting systems and are offered separately or in integrated suites. The
Company supports its Abra products through the Abra
34
<PAGE> 36
SupportPlus membership program, which provides customers with all software
updates and unlimited telephone support by the Company's technical support
staff.
In fiscal 1997, the Company derived approximately 38% of its total revenue
from its Abra product line, including software products, maintenance and support
agreements, and training and consulting services, for both Windows and DOS
customers. As of June 30, 1997, the Company had over 12,000 licensed Abra
customer locations. In addition, the Company had approximately 24,000 active
Abra SupportPlus maintenance and support agreements, which in certain cases
reflect the purchase of multiple maintenance and support agreements by single
Abra customers.
Abra HR for Windows automates the human resources function, enabling
businesses to more quickly and easily maintain and update employee and benefit
information, including employee profiles, current and historic compensation
information, education and employment history, skill set records, medical
benefits and savings plan enrollment eligibility data, and performance reviews.
Utilizing a variety of built-in reports, Abra HR for Windows also enables
businesses to instantaneously prepare cost analyses, summaries of employee
productivity and regulatory reports, including reports under affirmative action,
health and safety, workers' compensation and immigration regulations. In
addition, Abra HR for Windows can be easily customized to meet other unique
reporting requirements of a business.
Abra Payroll for Windows is an in-house payroll solution that enables
businesses to meet their payroll needs more cost-effectively than by utilizing
third-party service providers. Abra Payroll also provides secure, real-time
access to payroll data and enables users to comply with Federal and state tax
and withholding requirements more easily and efficiently, including preparation
of Forms W-2, 1099 and 941. The product also includes direct deposit
capabilities and electronic tax filing capabilities and interfaces with many
popular general ledger programs.
Abra Attendance for Windows tracks employee absences and leave accruals
with built-in features that enable businesses to define absence codes, handle
Family and Medical Leave Act compliance, and manage accruals and carryovers.
Abra Attendance for Windows enables businesses to create an array of attendance
plans for any employee using different seniority, accrual and carryover rules.
Abra Attendance for Windows integrates with Abra Payroll for Windows to provide
updates of vacation and other balances on employee pay stubs.
Abra Recruiting Solution is an integrated resume scanning and applicant
tracking software product, consisting of Abra Resume Scan and Abra Applicant.
Using the Abra Recruiting Solution, businesses can easily scan, organize and
evaluate incoming resumes, as well as search and review stored resumes
electronically to find appropriate job candidates. Abra Applicant automates the
labor-intensive process of sorting resumes and selecting candidates and enables
businesses to more easily and efficiently match job applicants' key skills,
experience and educational background with their specific needs. In addition,
Abra Applicant maintains easy-to-access information relating to candidate
interview status and the interviewers' comments and includes numerous
easy-to-use forms of correspondence, including acknowledgment, invitation, offer
and rejection letters.
Abra Train for Windows is a skill-based training management solution that
allows businesses to automate the tracking of employee training requirements and
history, the scheduling and management of courses and certifications and the
evaluation of the effectiveness of such initiatives.
Abra People Manager is designed specifically for smaller organizations that
do not have a dedicated human resources staff. The program consolidates critical
personnel information into one database on a personal computer and offers the
option to review and generate reports on such information. Abra People Manager
utilizes a Microsoft Access database, giving it a high degree of integration
with the Microsoft Office suite of products.
The Company's Abra products are 16-bit Windows programs and are compatible
with the Windows 3.x and Windows 95 environments. With the exception of Abra
People Manager, which is
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<PAGE> 37
written using Microsoft Visual Basic, all of the Abra products are written using
Microsoft Visual FoxPro, an object-oriented environment and data management
tool.
PRODUCT DEVELOPMENT
The Company intends to continue to develop its products to meet identified
market needs for applications that complement core accounting software systems
and to address the evolving technology needs of its customers. The Company's
current product development efforts are focused primarily on (i) developing
enhanced client/server versions of its existing products, (ii) completing
development of a number of new products and (iii) creating links for certain of
the Company's products with additional third-party core accounting systems and
with other industry-specific applications.
In order to strengthen its role as a leading provider of specialized
software solutions as its customers move from work group to client/server
environments, the Company is developing enhanced client/server versions of its
primary existing asset, human resources and payroll management products. These
products will employ technologies such as Microsoft Windows NT and Microsoft
BackOffice, as well as ActiveX development tools. The Company believes that
enhanced client/server technology will allow wider use of the Company's products
throughout a customer's enterprise. For example, enhanced client/server versions
of the Company's human resources and payroll management products are being
designed to facilitate employee self service, in which the employee will have
access to his or her own human resources data, with additional levels of access
for the employee's manager, the human resources manager and the payroll
administrator, all through a corporate Intranet. While traditional human
resources and payroll management systems require that record modifications be
initiated by the human resources and payroll staffs, this new workforce
management system will be designed to permit data to be captured and records to
be modified at various sources. The Company believes that this will improve the
efficiency and lower the costs related to its customers' human resources
function, particularly in larger organizations.
The Company intends to continue to identify market opportunities for new
product offerings that will complement its customers' core accounting systems.
For example, the Company is currently developing a software product designed to
automate the corporate budgeting process. Like the Company's current products,
this new budgeting product will be designed to function as a stand-alone system
or to integrate with core accounting systems. The Company is also developing a
recruiting tool that will enable customers to place help-wanted advertisements
on most major Web employment bulletin boards.
The Company is also focusing product development efforts on creating links
to allow for integration of its products with third-party core accounting and
reporting applications that are not currently compatible with the Company's
solutions. In addition, the Company is working to develop solutions that will
integrate and link its asset management products with complementary third-party
asset management products in industry-specific areas, such as sales tax,
property tax and inventory management.
TECHNICAL SUPPORT AND SERVICES
The Company believes that offering quality service and support is strategic
to its overall business objectives and provides the Company with a significant
opportunity to differentiate itself from competitors. The Company offers its
customers maintenance and technical support through its SupportPlus membership
programs, and also offers training and consulting services. The Company derives
a significant portion of it revenue from maintenance and support services. As of
June 30, 1997, the Company employed 66 persons in technical support and services
functions.
The Company's SupportPlus membership program provides customers expert
telephone support for FAS and Abra products, software updates to reflect tax law
and government regulatory changes, feature enhancements, newsletter
subscriptions, unlimited access to the Company's support center on
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<PAGE> 38
the Web and special discounts on new products and services. In each of fiscal
1996 and 1997, approximately 85% of the Company's customers purchased
maintenance and support agreements in connection with their initial licenses of
Company products. During each of these fiscal years, the Company achieved annual
renewal rates for its maintenance and support agreements, which typically have a
one-year term, of approximately 80%. The Company's telephone support
organization provides extensive product support to customers, including
assistance in connection with implementation, systems operation and regulatory
compliance. The Company's telephone support organization fielded over 270,000
calls in fiscal 1997.
In addition to technical support, the Company offers its customers the
option to attend training seminars covering the use of the Company's solutions
as well as a comprehensive nationwide seminar series featuring basic through
advanced interactive product training. Many of these seminars offer professional
education credits. The Company also offers on-site training at client
facilities. In certain circumstances, the Company's Business Partners provide
training and implementation services directly to their customers.
The Company is in the process of expanding its consulting services
operation, which provides installation, training, data conversion,
implementation and other consulting services. The Company believes this
consulting services operation will become increasingly important as it
introduces its enhanced client/server products in the future.
SALES AND MARKETING
The Company employs a multi-channel sales and marketing strategy utilizing
four primary channels: Business Partners, a direct-response telesales operation,
strategic marketing alliances and its direct sales organization. The Company
believes that this diverse sales and marketing strategy allows it to reach its
target markets in the most efficient and effective manner and reduces reliance
on any single distribution channel. The Company supports its multi-channel sales
and marketing strategy through national advertising in key financial and
business publications, sponsorship of promotional events for customers and
Business Partners and participation in trade shows and conferences. The Company
also uses its Web sites to provide information about Company products and to
reinforce the Company's brand image, as well as to support its sales channels.
As of June 30, 1997, the Company employed 99 persons in sales and marketing.
Business Partners. The Business Partner channel consists of (i) Big Six
and other accounting firms and accounting, human resources and payroll
management consultants and professionals ("professional referral partners") and
(ii) value-added resellers of core accounting and other business software
solutions ("VARs"). The Company believes that its Business Partners have
significant influence over product choices by customers and that its
relationships with its Business Partners are an essential element in its sales
and marketing efforts.
The Company's professional referral partners recommend the Company's
solutions to assist their clients in addressing asset, human resources and
payroll management needs. Because they typically are closely involved with
middle market businesses on a day-to-day basis, the Company's professional
referral partners are well-positioned to understand customer requirements and
make appropriate product recommendations. The Company believes that product
recommendations from accounting firms that have licensed the Company's solutions
for their internal use are particularly effective. The Company has entered into
national licensing relationships with four of the Big Six accounting firms and
has sold local licenses to approximately 3,000 national, regional and local
accounting firm locations. Use of the Company's solutions by clients of these
firms creates efficiencies for both the clients and the accounting firms in the
transmission and processing of asset, human resources and payroll data and frees
the accounting firm to focus more on providing business management and other
higher value services.
VARs are independent sales organizations that market and resell the
Company's products and often offer training and local installation,
implementation and customization services. VARs typically
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<PAGE> 39
have specialized experience in financial or human resources areas, and in many
cases focus on selling to middle market businesses. VARs market the Company's
solutions through their own contacts and to sales leads supplied by the Company.
The Company requires VARs to undergo prescribed training and certification
procedures before being authorized to sell and implement certain of the
Company's software solutions. As of June 30, 1997, the Company was affiliated
with over 150 certified VARs.
Direct-Response Telesales. The Company solicits new customers for its
products through periodic targeted mailings to its prospects. Utilizing its
proprietary database of more than 300,000 potential new customer business names
and other available mailing lists, the Company distributed over 2.8 million
pieces of direct mail relating to its product lines in fiscal 1997. Such
mailings, as well as targeted advertising, generate interest from potential
customers by stressing the cost-effectiveness and functionality of the Company's
products, ongoing changes in government regulations and the support and service
provided by the Company. Responses from potential customers are entered into the
Company's automated lead-tracking system. Once the information or a trial
product has been delivered to the potential customer, follow-up calls are made
until the customer decides whether or not to purchase the product.
Strategic Marketing Alliances. The Company currently has formal and
informal strategic marketing alliances with over 20 leading core accounting and
other industry-specific software vendors. These alliances permit these software
vendors to incorporate the Company's products as specialized integrated
applications or add-on modules to enhance their product offerings. These
alliances benefit the Company by creating an additional sales channel and by
providing a strong recommendation of its products by leading software vendors.
The Company's strategic marketing alliance partners currently include Great
Plains Software, Inc., Platinum Software Corporation, Scala North America, Inc.
and State of the Art, Inc.
Direct Sales. The Company has a direct sales force that currently markets
the Company's products to larger middle market customers and national accounts.
As of June 30, 1997, the Company's direct sales force consisted of seven
persons, located at the Company's offices in Reston, Virginia and St.
Petersburg, Florida and other locations. In addition to marketing the Company's
products to new customers, this channel leverages the Company's broad installed
customer base to sell additional products to divisions or branches of existing
customers.
CUSTOMERS
The Company's FAS asset management products are targeted primarily to the
asset manager, tax accountant, corporate controller and chief financial officer
of middle market businesses and to accounting firms that typically use the
software to perform fixed asset management services for their customers. The
Company's Abra human resources and payroll management products are targeted
primarily to the human resources manager, corporate controller and chief
financial officer of middle market businesses.
The Company has licensed its products to over 40,000 customer locations in
a wide variety of industries and organizations. No one customer accounted for
more than 1% of the Company's total revenue in fiscal 1997.
RESEARCH AND DEVELOPMENT
The Company's research and development staff combines tax, accounting and
asset, and human resources management expertise with programming skills. As of
June 30, 1997, the Company had 62 full-time software development personnel (or
22% of the total employee base) with expertise in Windows, Windows NT,
client/server and/or Internet environments. Of these developers, five are
Certified Public Accountants and seven are Certified Payroll Professionals. In
fiscal 1995, 1996 and 1997 and the three months ended June 30, 1997, the Company
incurred approximately $5.7 million, $7.4 million, $6.1 million and $2.0
million, respectively, in research and development expenses.
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<PAGE> 40
The development and updating of asset, human resources and payroll
management software that incorporates complex regulations demands a rigorous
development cycle that is mandated by the ongoing adoption of new laws,
regulations and forms by Federal, state and local governments and other
regulatory agencies, as well as the uncertain timing of these changes and
releases. The Company has a team of software developers who are experienced in
this development and updating process and the Company has created a set of
proprietary development tools that simplify the process of producing updates and
annual versions of the Company's products within required time frames.
INTELLECTUAL PROPERTY RIGHTS AND LICENSES
The Company generally does not execute licenses with its customers but
instead seeks to protect its software and other intellectual property through a
combination of trade secret, copyright and trademark law, confidentiality
agreements and contractual restrictions on copying and disclosure contained in
its "shrink wrap" licenses and nondisclosure agreements with its employees and
contractors. The Company provides its products to customers on a "right-to-use"
basis under non-exclusive shrink wrap licenses, which generally are
nontransferable and have a perpetual term. The license agreements generally
provide that the software is provided "as is" without warranty of any kind.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult and, while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem, particularly
in international markets and as a result of the growing use of the Internet. The
Company's shrink wrap licenses are not signed by licensees and, therefore, it is
possible that such licenses may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the steps taken by the Company to protect
its proprietary rights will be adequate or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's products and technologies.
The Company is not aware that any of its products, trademarks or other
proprietary rights infringe the proprietary rights of third parties. However,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products. As
the number of software products in the industry increases and the functionality
of these products further overlap, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time-consuming and expensive to defend, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty agreements, if required, may not be available on terms
acceptable to the Company, or at all, which could have a material adverse effect
on the Company's business, operating results and financial condition.
COMPETITION
The market for the Company's products is highly competitive. Although the
Company is not aware of any competitor which competes with it across all of its
product lines, a variety of companies currently offer products that compete with
one or more of the Company's product lines. In addition, as the Company targets
new markets and introduces new product lines, it expects to encounter
competition from additional competitors. The Company's products compete
primarily on the basis of product features and functions, product quality and
reliability, timeliness of product release and updating, ease of use, brand
recognition, quality of customer support, price and product line breadth. The
Company believes that its products generally compete effectively with respect to
these factors.
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<PAGE> 41
The Company faces different competitors for each of its product lines. The
Company's asset management products compete principally with products offered by
the Bureau of National Affairs, Inc. in the single-user and work group
environments, and the Company anticipates that its enhanced client/server
products, when introduced, will compete with products offered by PeopleSoft,
Inc., Oracle Corporation and others. The Company's human resources and payroll
management products compete primarily with Spectrum Human Resources Corporation,
Human Resources Microsystems and Ceridian Corporation (FLX) in the single-user
and work group environment, and the Company anticipates that its enhanced
client/server human resources and payroll products, when introduced, will
compete with products offered by PeopleSoft, Inc., Ultimate Software Group, Inc.
and SAP AG in the client/server environment. The Company's human resources and
payroll management products also compete with payroll service bureaus, such as
ADP, Inc. and Paychex, Inc., and with in-house management information systems
staffs. Several of the Company's competitors or potential competitors have
significantly greater financial, technical and marketing resources than the
Company. See "Risk Factors -- Compensation."
FACILITIES
The Company's corporate headquarters, including its principal
administrative, product development, product management, technical support, and
sales and marketing operations, are located in 39,000 square feet of office
space in a building located in Reston, Virginia. The Company occupies the space
under leases expiring on February 28, 2002, subject to the Company's right to
extend the term by two years for part of the space, and by two or five years for
the remainder of the space. The Company's Abra Software, Inc. subsidiary leases
26,000 square feet of office space in St. Petersburg, Florida, under a lease
that expires in December 1997. The Company also leases space in Palo Alto,
California, McLean, Virginia and Burlington, Ontario, Canada. Total lease
payments for the Company's facilities were approximately $1.0 million in fiscal
1997. The Company believes that its existing facilities are suitable and
adequate for its present needs and that suitable additional space will be
available as needed to accommodate any expansion of operations.
EMPLOYEES
As of June 30, 1997, the Company had 283 full-time employees, including 62
employees primarily engaged in research and development, 66 in technical support
and services, 99 in sales and marketing, and 56 in operations, finance and
administration.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operation in the normal course of business. The Company is
not currently a party to any legal proceedings.
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<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company, and their ages as of June
30, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ------------------------------------------------
<S> <C> <C>
James F. Petersen (1)................ 53 Chairman of the Board of Directors
Timothy A. Davenport (1)............. 41 President, Chief Executive Officer and Director
David N. Bosserman................... 40 Executive Vice President, Chief Financial
Officer and Treasurer
David L.G. Horn...................... 40 Vice President, FAS Products Group
James F. Foster...................... 44 President, Abra Software, Inc.
Robert H. Skinner.................... 45 Senior Vice President, Sales
Elaine Kelly......................... 33 Vice President, Marketing
Herbert R. Brinberg (1)(2)(3)........ 71 Director
Richard A. Lefebvre (2).............. 50 Director
John H. Martinson (1)(2)(3).......... 49 Director
</TABLE>
- ---------------
(1) Member of the Compensation and Finance Committee
(2) Member of the Option Committee
(3) Member of the Audit Committee
James F. Petersen co-founded the Company in 1982 and has served as the
Company's Chairman of the Board since its inception. He served as President and
Chief Executive Officer of the Company from 1982 to June 1995. Before founding
the Company, Mr. Petersen was Vice President and Treasurer of Aspen Systems
Corporation, an electronic information and publishing company.
Timothy A. Davenport was appointed President, Chief Executive Officer and a
director of the Company in June 1995. From March 1987 to June 1995, Mr.
Davenport served as Vice President, Developer Tools Group, and Vice President,
Graphics Division, for Lotus Development Corporation ("Lotus"), a computer
software company that markets and develops productivity and work group
applications. Prior to joining Lotus, Mr. Davenport was employed from March 1985
to March 1987 as Vice President of Product Marketing for Decision Resources, a
division of Ashton-Tate Corporation, a company that developed business graphics
applications.
David N. Bosserman has served as the Company's Executive Vice President,
Chief Financial Officer and Treasurer since October 1996. Previously, he served
as the Company's Vice President, Corporate Finance from June 1993 to September
1996, and Director, Finance and Operations from May 1992 to May 1993. From
January 1985 to May 1992, Mr. Bosserman served in various positions, leading to
Senior Manager, at Deloitte & Touche.
David L.G. Horn has served as the Company's Vice President, FAS Products
Group since February 1996. He joined the Company in October 1995 as the
Company's Vice President, FAS Product Management. From February 1984 to October
1995, Mr. Horn was employed by Hewlett-Packard Co., a manufacturer of electronic
products, in various capacities, most recently as Future Products Manager for
its office products division.
James F. Foster became President of Abra Software, Inc., a wholly owned
subsidiary of the Company ("Abra Software"), in April 1993. From September 1992
until April 1993, Mr. Foster served as Chief Operating Officer of Abra Software.
Prior to joining Abra Software, Mr. Foster was employed from July 1984 to
September 1992 by Dun & Bradstreet Software Services, Inc., a business
application software provider, where he held a number of positions in the human
resources software area, most recently as Director of Sales and Marketing for
the personal computer human resources division.
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<PAGE> 43
Robert H. Skinner has served as Senior Vice President, Sales since April
1996. Previously, he served as the Company's Vice President of Sales and
Marketing for FAS from April 1995 to April 1996, and as Director of Sales from
June 1992 to April 1995. From December 1982 to June 1992, Mr. Skinner served as
Vice President of Sales and Marketing for Trinet, Inc., a business information
marketing company.
Elaine Kelly has served as Vice President, Marketing since September 1996.
From October 1993 to September 1996, Ms. Kelly served as a Director of
Marketing. From October 1990 until October 1993, Ms. Kelley served as Marketing
Manager of the Company. From July 1988 to September 1990, Ms. Kelly served as
manager of Marketing Services for Netron Inc., a Canadian software company.
Herbert R. Brinberg has served as a director of the Company since 1990.
Since 1990, Dr. Brinberg has served as the President of Parnassus Associates
International, a company that assists organizations with information and
technology management. From 1978 to 1990, Dr. Brinberg was President and Chief
Executive Officer of Wolters Kluwer U.S. Corporation, an international
publishing company. Dr. Brinberg also serves as a director of K&F Industries,
Inc., a manufacturer of airplane parts and supplies.
Richard A. Lefebvre became a director of the Company in February 1996. He
currently serves as Chairman of Axent Technologies, Inc. ("Axent"), a provider
of enterprise-wide information security solutions, a position he has held since
January 1989. From January 1989 through July 1997, he also served as President
and Chief Executive Officer of Axent. Prior to joining Axent, Mr. Lefebvre was
Chief Operating Officer at Sage Software, Inc. (now InterSolv Inc.), a computer
software company, from May 1987 to December 1988. He currently serves on the
boards of Axent and Sylvon Software, Inc., a software, consulting and training
firm.
John H. Martinson has served as a director of the Company since 1988. Since
1986, Mr. Martinson has been a general partner of Edison Partners, L.P., which
is the general partner of Edison Venture Fund, L.P. ("Edison"), a venture
capital partnership and a shareholder of the Company. Mr. Martinson is a
director of Dendrite International Inc. and Nobel Education Dynamics, Inc. He is
a director of the National Venture Capital Association and Chairman of the New
Jersey Technology Council.
Officers of the Company serve at the pleasure of the Board of Directors.
See "-- Employment Agreements."
COMPOSITION OF THE BOARD OF DIRECTORS
The Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. The Board consists of two Class I
Directors (Messrs. Petersen and Martinson), three Class II Directors (Dr.
Brinberg, Mr. Davenport and a vacancy) and two Class III Directors (Mr. Lefebvre
and a vacancy). At each annual meeting of shareholders, the number of directors
in the applicable class are elected for a three-year term to succeed the
directors of the same class whose terms are then expiring. The terms of the
Class I Directors, Class II Directors and Class III Directors will expire upon
the election and qualification of successor directors at the annual meeting of
shareholders held in calendar years 1999, 1997 and 1998, respectively. Dr.
Brinberg and Messrs. Del Presto and Davenport have been nominated by the Board
of Directors for re-election at the 1997 annual shareholders meeting scheduled
for September 1997.
Pursuant to a 1995 shareholders voting agreement (the "Voting Agreement")
between Mr. Petersen and Edison, Edison agreed to vote its shares in favor of
Mr. Petersen's election as a director as well as for the election of a nominee
put forward by Mr. Petersen. The Voting Agreement will terminate upon the
closing of this offering.
Mr. Davenport was appointed to the Board as a condition of his employment.
See "-- Employment Agreements."
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<PAGE> 44
BOARD COMMITTEES
The Board of Directors has appointed a Compensation and Finance Committee,
consisting of Messrs. Petersen, Davenport and Martinson and Dr. Brinberg, which
establishes the compensation of officers of the Company. The Company also has an
Option Committee, consisting of Messrs. Martinson and Lefebvre and Dr. Brinberg,
which administers the Company's stock plans. The Board of Directors has also
appointed an Audit Committee, consisting of Mr. Martinson and Dr. Brinberg,
which reviews the results and scope of the audit and other services provided by
the Company's independent certified public accountants.
DIRECTOR COMPENSATION
As compensation for serving on the Board of Directors, each director who is
not employed by the Company or serving on the Board as a representative of an
institutional investor (an "outside director") receives an annual retainer of
$6,000, plus a fee of $2,000 for attendance at each meeting of the full Board
and $500 for each committee meeting. In April 1997, the current outside
directors, Dr. Brinberg and Mr. Lefebvre, received options under the 1992 Stock
Option Plan to purchase 4,375 and 5,755 shares of Common Stock, respectively, at
an exercise price of $3.83 per share, which options vest annually over the
remainder of their terms in office. In addition, each outside director elected
or reelected after August 1997 will receive stock options under the Company's
1997 Director Stock Option Plan. See "-- Stock Plans."
Remuneration of directors who represent institutional investors is governed
by the terms of the original agreement between the Company and such
institutional investor. In the case of Edison, Mr. Martinson receives no
retainer or fees for attendance at Board meetings. All directors are reimbursed
for reasonable expenses incurred by them in connection with their attendance at
Board or committee meetings.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company with respect to services rendered during fiscal 1997 to the Company's
Chief Executive Officer and each of the four other most highly compensated
executive officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION(1)
- ------------------------------------------- -------- ------- ------------ ----------------
<S> <C> <C> <C> <C>
James F. Petersen.......................... $178,864 $31,706 -- $5,162
Chairman of the Board
Timothy A. Davenport....................... 206,345 37,763 -- 5,682
President and Chief Executive Officer
David L.G. Horn............................ 132,750 30,628 11,250 4,226
Vice President, FAS Products Group
James F. Foster............................ 154,560 21,011 45,000 1,876
President, Abra Software
Robert H. Skinner.......................... 164,024(2) 25,782 52,500 5,058
Senior Vice President, Sales
</TABLE>
- ---------------
(1) Represents matching contributions to the Company's 401(k) Plan made by the
Company on behalf of each of the Named Executive Officers and an additional
profit sharing contribution of $1,876 for each.
(2) Includes $55,501 in sales commissions.
The following table sets forth information with respect to grants of
options to purchase shares of Common Stock made during fiscal 1997 to the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------------------
NAME GRANTED(2) FISCAL YEAR PER SHARE DATE 5% 10%
- ------------------------- ----------- --------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Timothy A. Davenport..... -- -- -- -- -- --
James F. Petersen........ -- -- -- -- -- --
David L.G. Horn.......... 3,750 3.7% $3.50 5/30/05 $ 7,236 $ 17,823
7,500 3.83 10/10/05 15,851 39,041
James F. Foster.......... 45,000 14.9 3.50 5/30/05 86,834 213,877
Robert H. Skinner........ 37,500 17.4 3.50 5/30/05 72,362 178,231
15,000 3.83 10/10/05 31,701 78,082
</TABLE>
- ---------------
(1) The amounts shown as potential realizable values on the options are based on
assumed annualized rates of appreciation in the price of the Common Stock of
5% and 10% over the term of the options, as required by the rules of the
Securities and Exchange Commission. Actual gains, if any, on stock option
exercises are dependent on future performance of the Common Stock. There can
be no assurance that the potential realizable values reflected in this table
will be achieved.
(2) All options vest 20% per year beginning on the first anniversary of the date
of grant.
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<PAGE> 46
The following table sets forth information regarding the exercise of stock
options during fiscal 1997 and the value of options held as of the end of fiscal
1997 by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SHARES SUBJECT VALUE OF UNEXERCISED
SHARES TO UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
UPON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- --------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James F. Petersen........ 450,000(2) $1,692,000 -- -- -- --
Timothy A. Davenport..... 60,000 69,600 -- 315,000 -- $ 365,400
David L.G. Horn.......... -- -- 2,250 20,250 $ 1,868 8,708
James F. Foster.......... -- -- 34,500 63,000 74,010 42,990
Robert H. Skinner........ -- -- 9,000 66,000 13,485 32,603
</TABLE>
- ---------------
(1) The dollar values have been calculated by determining the difference between
(i) the fair market value of the securities underlying the options at the
exercise date, in the case of "value realized," or the fiscal year end, in
the case of "value of unexercised in-the-money options" and (ii) the
aggregate exercise price of the options. Solely for purposes of determining
these values, the Company has assumed that the fair market value of the
Common Stock on all applicable dates was the fair market value as determined
by the Board of Directors on such date, since the Common Stock was not
traded on an established market prior to this offering.
(2) In connection with his option exercise, Mr. Petersen secured a short-term
loan from the Company to pay the withholding taxes in the amount of $763,890
due as a result of such exercise, based on a per share exercise price of
$0.07 and a fair market value on the date of exercise of $3.83. The note
bore interest at the rate of 5.66%. In connection with the option exercise,
Mr. Petersen delivered to the Company 199,429 shares of Common Stock to pay
off the principal and interest on this loan.
EMPLOYMENT AGREEMENTS
Pursuant to an Employment Agreement between James F. Petersen and the
Company dated May 17, 1995, the Company agreed to employ Mr. Petersen as
Chairman of the Company until March 30, 2000, with a salary of $170,280, subject
to adjustment. Mr. Petersen is entitled to payment of his salary through March
30, 2000 should his employment be terminated by the Board other than for cause.
Mr. Petersen has agreed not to compete against the Company during his employment
and for one year thereafter.
In connection with the May 1995 hiring of Timothy A. Davenport, President
and Chief Executive Officer of the Company, the Company agreed to pay Mr.
Davenport an annual base salary of $200,000. In addition, the Company issued to
Mr. Davenport, pursuant to its 1992 Stock Option Plan, options to purchase
375,000 shares of Common Stock at an exercise price of $2.67 per share, 300,000
of which will vest equally over a five-year period and 75,000 of which will vest
in full immediately upon the closing of this offering. Mr. Davenport is entitled
to six months of base salary as severance pay should his employment be
terminated other than for cause, except in the case of constructive termination
due to a change in control, in which case he will continue to receive his salary
for 12 months and his stock option vesting will be accelerated by 24 months. The
Company also reimbursed Mr. Davenport for certain relocation expenses and agreed
to appoint him to the Board of Directors.
BONUS PLAN
The Company has a bonus program for certain designated key employees of the
Company, including all executive officers, pursuant to which such employees are
paid cash bonuses based upon the attainment of certain specified corporate,
divisional and individual goals for the year. The amount of the bonus to which
each such employee is entitled is finally determined by the Board of Directors.
STOCK PLANS
Under the Company's Employee Incentive Stock Option Plan adopted in 1988
(the "1988 Option Plan"), there were outstanding options to purchase 145,500
shares of Common Stock as of June 30, 1997. No further options may be granted
under the 1988 Option Plan.
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<PAGE> 47
The Company's Amended and Restated 1992 Stock Option Plan (the "1992 Option
Plan") covers 1,875,000 shares of Common Stock, after giving effect to an
amendment to the 1992 Option Plan approved by the Board of Directors and
submitted to, but not yet approved by, the Company's shareholders. As of June
30, 1997, options to purchase 759,703 shares of Common Stock were outstanding
under the 1992 Option Plan. In connection with the adoption of the 1997
Incentive Plan (as defined below), the Board has provided that no further
options may be granted under the 1992 Option Plan. The 1992 Option Plan provides
for the grant, as of April 24, 1997, to each outside director who was serving on
the Board of Directors as of such date, of a non-statutory option to purchase a
pro rata portion of 22,500 shares of Common Stock reflecting the remainder of
the three-year term of such director. Such options vest over the remainder of
such term. In April 1997, Dr. Brinberg and Mr. Lefebvre were each granted a
non-statutory option under the 1992 Option Plan to purchase 4,375 shares and
5,755 shares, respectively, of Common Stock at an exercise price of $3.83 per
share.
In August 1997, the Board of Directors adopted the Company's 1997 Stock
Incentive Plan (the "1997 Incentive Plan"). The Company has reserved 1,500,000
shares of Common Stock for issuance under the 1997 Incentive Plan. The 1997
Incentive Plan provides that a variety of awards, including stock options, stock
appreciation rights and restricted and unrestricted stock grants, may be made to
the Company's employees, officers, consultants and advisors who are expected to
contribute to the Company's future growth and success. The Option Committee will
administer the 1997 Incentive Plan and determine the price and other terms upon
which awards shall be made. Stock options may be granted either in the form of
incentive stock options or non-statutory stock options. The option exercise
price of incentive stock options may not be less than the fair market value of
the Common Stock on the date of grant. While the Company currently anticipates
that most grants under the 1997 Incentive Plan will consist of stock options,
the Company may grant stock appreciation rights, which represent rights to
receive any excess in value of shares of Common Stock over the exercise price;
restricted stock awards, which entitle recipients to acquire shares of Common
Stock, subject to the right of the Company to repurchase all or part of such
shares at their purchase price in the event that the conditions specified in the
award are not satisfied; or unrestricted stock awards, which represent grants of
shares to participants free of any restrictions under the 1997 Incentive Plan.
Options or other awards that are granted under the 1997 Incentive Plan but
expire unexercised are available for future grants. As of the date of this
Prospectus, no awards have been granted under the 1997 Incentive Plan. It is
currently expected, however, that options to purchase an aggregate of
approximately 180,000 shares of Common Stock, at an exercise price equal to the
initial public offering price per share in this offering, will be granted under
the 1997 Incentive Plan immediately after the effectiveness of this offering.
In August 1997, the Board of Directors adopted the Company's 1997 Director
Stock Option Plan (the "Director Plan") to provide for the grant of
non-statutory stock options to outside directors. The Company has reserved
150,000 shares for issuance under the Director Plan. The Director Plan provides
(i) in the case of an outside director elected at the commencement of a
three-year term, for the grant to such director as of the date of election of an
option exercisable to purchase 22,500 shares of Common Stock and (ii) in the
case of an outside director elected in the course of a three-year term (for
example, to fill a vacancy), for the grant to such director of an option to
purchase 22,500 shares of Common Stock multiplied by a fraction, the numerator
of which is 36 minus the number of whole calendar months which have elapsed
since the commencement of the term and the denominator of which is 36. All
options granted under the Director Plan will have an exercise price equal to the
fair market value of the Common Stock on the date of grant and will vest in
equal annual installments over the remainder of such director's three-year term,
on the date of the annual meeting of shareholders. No options have been granted
under the Director Plan to date.
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors in August 1997. A total of 250,000
shares of Common Stock are reserved for issuance under the Purchase Plan. The
Purchase Plan, which is intended to qualify under Section 423 of the Code, will
be administered by the Board of Directors or a committee thereof.
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<PAGE> 48
Employees (including officers and employee directors of the Company) are
eligible to participate in the Purchase Plan if they are customarily employed
for more than 20 hours per week five months per year. The Company has not yet
offered or sold shares of Common Stock to employees pursuant to the Purchase
Plan, but the first offering under the Purchase Plan will commence on the
effective date of this offering and will end on December 31, 1997. Thereafter,
the Purchase Plan will be implemented in sequential six-month offering periods.
The Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed an aggregate value of $25,000 (measured
at the beginning of each offering period) in any calendar year. The price at
which stock may be purchased under the Purchase Plan is equal to 85% of the
lower of the fair market value of the Common Stock on the first day of the
offering period (the initial public offering price in the case of the first
offering) or the last day of the offering period. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of a participant's employment
with the Company.
401(k) PLAN
In January 1991, the Company adopted a tax-qualified profit sharing plan
(the "401(k) Plan") covering all of the Company's full- and part-time employees.
Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the lower of 15% of their eligible compensation or the
statutorily prescribed annual limit, and have the amount of such reduction
contributed to their retirement accounts. Also, the Company may, at the
discretion of the Board of Directors, make periodic "profit sharing"
contributions to the employees' accounts. The 401(k) Plan is intended to qualify
under Section 401 of the Code so that contributions by employees or by the
Company to the 401(k) Plan, and income earned on 401(k) Plan contributions, are
not taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company will be deductible by the Company when made. The
Trustee under the 401(k) Plan, at the direction of each participant, invests the
assets of the 401(k) Plan in any of eight investment options. The Company will
make a matching contribution in an amount equal to $0.50 for each $1.00
contributed by an employee up to a maximum of 2% of the participant's
compensation, as defined in the 401(k) Plan. Employer matching contributions and
profit sharing contributions vest to each employee at 50% after two years of
employment, 75% after three years and 100% after four years. In calendar years
1993 through 1995, the participation of highly compensated employees was limited
to 5.5% of eligible compensation. The Company made profit sharing contributions
during calendar year 1997 in the aggregate amount of approximately $220,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Petersen, Chairman of the Board, and Mr. Davenport, President and Chief
Executive Officer, serve on the Compensation and Finance Committee. For
information regarding certain transactions and relationships between the Company
and Mr. Petersen and Mr. Davenport, see "-- Employment Agreements" and "Certain
Transactions."
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<PAGE> 49
CERTAIN TRANSACTIONS
The Company paid a dividend of $0.455 per share of Common Stock to
shareholders of record on February 20, 1997 and a dividend of $0.915 per share
of Common Stock to shareholders of record on June 27, 1997. All of the Board
members (or their affiliates) except for Mr. Lefebvre were shareholders as of
the record date for payment of the first dividend and all of the Board members
(or their affiliates) were shareholders as of the record date for payment of the
second dividend. In connection with the two dividends, Mr. Petersen received
$2,876,903; Mr. Davenport received $137,100; Edison, an affiliate of Mr.
Martinson, received $5,527,292; Dorothy T. Webb, who was then a director of the
Company, received $1,027,586; Dr. Brinberg received $20,550; Mr. Lefebvre
received $3,294; and PNC Capital Corp. ("PNC"), a shareholder of the Company and
an affiliate of Peter V. Del Presto, who was then a director of the Company,
received the payments described in the following paragraph.
The Loan and Warrant Purchase Agreement by and between PNC and the Company
dated as of March 2, 1993, prohibits the Company from issuing cash dividends to
its shareholders until the closing of an initial public offering. In
consideration for PNC's waiver of this restriction in connection with the two
dividend issuances described above, the Company agreed, with regard to the first
dividend, to reduce the per share exercise price of the PNC Warrant by the
dividend amount (i.e., from $2.667 to $2.213 per share), and, with regard to the
second dividend, to pay PNC a dividend equivalent payment of $432,338 ($0.915
multiplied by the 472,500 shares underlying the PNC Warrant) and to amend the
PNC Warrant to reduce the then current per share exercise price thereunder by
20% of the dividend value (i.e., from $2.213 to $2.029 per share). PNC is a
beneficial shareholder of the Company and Mr. Del Presto, a former director of
the Company, is a Vice President of PNC. See "Description of Capital
Stock -- Warrants."
In connection with the above described dividends, all employees holding
nonstatutory stock options were given the opportunity to elect to pay some or
all of their withholding tax obligations resulting from exercise of their
options in the form of a secured promissory note, bearing interest at the rate
of 5.66% and 6.06% per annum for the first and second dividend, respectively,
and due and payable to the Company, in cash or stock of the Company (valued at
the then current fair market value), no later than ten business days after the
date upon which the cash dividend was paid. The Company received a number of
such promissory notes from employees, including a note in the amount of $763,890
from Mr. Petersen, Chairman of the Board and a director, and a note in the
amount of $702,578 from Ms. Webb, a former director. Both Mr. Petersen and Ms.
Webb delivered Common Stock to the Company to pay off the loan (199,429 and
183,282 shares, respectively).
The Company has adopted a policy that any future transactions between the
Company and its executive officers, directors and affiliates must (i) be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties and (ii) be approved by a majority of the members of the Company's
Board of Directors and by a majority of the disinterested members of the
Company's Board of Directors.
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<PAGE> 50
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Common Stock as of June 30, 1997, after
giving effect to the Preferred Stock Conversion and the Warrant Exercise, and as
adjusted to reflect the sale of shares offered hereby, (i) by each person who is
known by the Company to own beneficially more than 5% of the outstanding shares
of the Common Stock, (ii) by each of the Named Executive Officers, (iii) by each
director of the Company, (iv) by all directors and executive officers of the
Company as a group and (v) by each Selling Shareholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR NUMBER OF OWNED AFTER
TO THE OFFERING(1) SHARES THE OFFERING(1)(2)
----------------------- BEING -------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- -------------------------------------------- ------------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
James F. Petersen........................... 2,033,695 (3) 25.1% 239,715 1,793,980 16.5%
Timothy A. Davenport........................ 195,000 (4) 2.4 -- 195,000 1.8
David L.G. Horn............................. 3,000 (5) * -- 3,000 *
James F. Foster............................. 48,000 (6) * -- 48,000 *
Robert H. Skinner........................... 17,250 (7) * -- 17,250 *
John H. Martinson........................... 4,034,520 (8) 49.7 475,556 3,558,964 32.8
Herbert R. Brinberg......................... 15,000 * -- 15,000 *
Richard A. Lefebvre......................... 3,600 * -- 3,600 *
All directors and executive officers as a
group (10 persons)........................ 6,362,515 (9) 77.0 715,271 5,647,244 51.3
OTHER 5% SHAREHOLDERS:
Edison Venture Fund, L.P. .................. 4,034,520 (10) 49.7 475,556 3,558,964 32.8
997 Lenox Drive, #3
Lawrenceville, NJ 08648
James F. Petersen Trust U/A 12/31/93........ 1,043,806 (11) 12.9 123,035 920,771 8.5
8034 Galla Knoll Drive
Springfield, VA 22153
Dorothy T. Webb Family Trust................ 714,501 (12) 8.8 84,219 630,282 5.8
c/o Dorothy T. Webb
Abra Software, Inc.
888 Executive Center Drive West
St. Petersburg, FL 33702
PNC Capital Corp. .......................... 472,500 (13) 5.5 55,694 416,806 3.7
Pittsburgh National Bank
Fifth Avenue and Wood St.
Pittsburgh, PA 15222
OTHER SELLING SHAREHOLDERS:
Irrevocable Trust for James Mitchell
Petersen.................................. 300,000 3.7 35,361 264,639 2.4
Petersen Trust for Nieces and Nephews....... 75,000 * 8,840 66,160 *
William H. Woywood Irrevocable Trust, Dated
10/17/96.................................. 5,217 * 615 4,602 *
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options or warrants held by that person
that are exercisable, or will become exercisable within 60 days after June
30, 1997, are deemed outstanding. Such shares, however, are not deemed
outstanding for purposes of computing the percentage ownership of any other
person, except that the Warrant Exercise is assumed in all calculations.
Unless otherwise indicated in the footnotes to this table, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable. Unless otherwise indicated, the address of each of
the individuals listed in the table is: c/o Best Software, Inc., 11413
Isaac Newton Square, Reston, VA 20190.
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<PAGE> 51
(2) Assumes an initial public offering price of at least $12.00 per share. If
the initial public offering price is lower than $12.00 per share, PNC will
not sell any shares in this offering and the other Selling Shareholders
will each sell an additional number of shares equal to their pro rata
portion of the shares not sold by PNC. Also assumes no exercise of the
Underwriters' over-allotment option. If the over-allotment option is
exercised in full, the following Selling Shareholders will sell the
following numbers of additional shares: Edison, 289,295; James F. Petersen,
70,980; James F. Petersen Trust, 74,846; Dorothy T. Webb Family Trust,
51,234; PNC, 33,881; Irrevocable Trust for James Mitchell Petersen, 21,512;
Petersen Trust for Nieces and Nephews, 5,378; and William H. Woywood
Irrevocable Trust, 374.
(3) Excludes 375,000 shares held by two irrevocable trusts established by Mr.
Petersen for the benefit of members of his family. Mr. Petersen is not a
trustee or beneficiary of either trust and disclaims beneficial ownership
of these shares. Includes 1,043,806 shares held by a trust established by
Mr. Petersen for the benefit of Nancy Petersen, of which Mr. Petersen is a
trustee and over which he has voting control. See Note (11).
(4) Includes 75,000 shares issuable upon exercise of stock options which will
become exercisable on the effective date of this offering.
(5) Consists of 3,000 shares issuable upon exercise of stock options which are
exercisable within 60 days of June 30, 1997.
(6) Consists of 48,000 shares issuable upon exercise of stock options which are
exercisable within 60 days of June 30, 1997.
(7) Consists of 17,250 shares issuable upon exercise of stock options which are
exercisable within 60 days of June 30, 1997.
(8) These shares are held by Edison. Mr. Martinson is a general partner of
Edison Partners, L.P., the general partner of Edison. Mr. Martinson,
together with the other general partners of Edison Partners, L.P., shares
voting and investment power with respect to the shares held by Edison. Mr.
Martinson does not own any shares in his individual capacity.
(9) Includes 566,506 shares issuable upon exercise of the PNC Warrant and stock
options which are exercisable within 60 days of June 30, 1997, or, in the
case of Mr. Davenport's 75,000 option shares, will become exercisable upon
the closing of this offering.
(10) Includes 625,005 shares of Common Stock into which 41,667 shares of Series
A Preferred Stock will automatically convert upon the closing of this
offering.
(11) Mr. Petersen is a trustee of this trust and exercises voting control of
these shares.
(12) Dorothy T. Webb, an employee of the Company and formerly a director and
executive officer of the Company, is a trustee of this trust, which is for
the benefit of members of Ms. Webb's family. Excludes 5,217 shares held by
an irrevocable trust established by Ms. Webb for the benefit of a member of
her family. Ms. Webb is not a trustee or beneficiary of such irrevocable
trust and disclaims beneficial ownership of these shares.
(13) Consists of 472,500 shares of Common Stock issuable upon the exercise of
the PNC Warrant. PNC has indicated its intention to exercise the PNC
Warrant to purchase 55,694 shares of Common Stock prior to the offering and
to sell such shares in this offering. Peter V. Del Presto, a former
director of the Company, is a Vice President of PNC. See Note (2).
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<PAGE> 52
DESCRIPTION OF CAPITAL STOCK
Following the closing of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, no par value per
share, and 1,000,000 authorized shares of preferred stock, $.01 par value per
share (the "Preferred Stock").
COMMON STOCK
As of June 30, 1997, there were 8,115,722 shares of Common Stock
outstanding and held of record by 84 shareholders, after giving effect to the
Preferred Stock Conversion and the Warrant Exercise. Based upon the number of
shares outstanding as of that date and after giving effect to the issuance of
the 2,750,000 shares of Common Stock to be sold by the Company in this offering,
there will be 10,865,722 shares of Common Stock outstanding upon the closing of
this offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for, fully
paid and non-assessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of Preferred Stock which the Company may designate and issue
in the future.
PREFERRED STOCK
As of June 30, 1997, there were outstanding 41,667 shares of Class A
Preferred Stock held of record by one shareholder. Upon the closing of this
offering, all outstanding shares of Class A Preferred Stock will be converted
automatically into an aggregate of 625,005 shares of Common Stock. Immediately
after the closing of this offering, the Company intends to file an amendment to
its Amended and Restated Articles of Incorporation to eliminate the Class A
Preferred Stock.
The Board of Directors will have the authority, without further action of
the shareholders of the Company, to issue up to an aggregate of 1,000,000 shares
of Preferred Stock in one or more series and to fix or alter the designations,
preferences, rights and qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of such series.
The Board of Directors, without shareholder approval, can issue Preferred
Stock with voting and conversion rights that could adversely affect the voting
power of holders of Common Stock. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, may have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plans
to issue any shares of Preferred Stock.
WARRANTS
Following this offering and the Warrant Exercise, the PNC Warrant will be
exercisable to purchase 416,806 shares of Common Stock (382,925 shares if the
Underwriters over-allotment option is
51
<PAGE> 53
exercised in full) at an exercise price of $2.029 per share until March 2, 2003.
See "Certain Transactions."
In addition, there are outstanding warrants to purchase a total of 3,690
shares of Common Stock at an exercise price of $3.08, held by eight shareholders
exercisable until December 23, 1997.
VIRGINIA LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company will be subject to the affiliated transaction provisions of
Sections 13.1-725 through 13.1-728 of the Virginia Stock Corporation Act (the
"VSCA"). These affiliated transaction provisions prohibit a Virginia corporation
with more than 300 shareholders from engaging in an "affiliated transaction"
with an "interested shareholder" for a period of three years after the date of
the transaction in which the person became an interested shareholder, unless the
affiliated transaction is approved in a prescribed manner. "Affiliated
transactions" include mergers, asset sales and certain other transactions
between or among the corporation and an interested shareholder. Subject to
certain exceptions, an "interested shareholder" is a person who, together with
affiliates and associates, owns, or within the preceding three years did own,
10% or more of any class of the corporation's voting stock.
The Company will also be subject to the control share acquisition
provisions of Sections 13.1-728.1 through 13.1-728.9 of the VSCA. Pursuant to
these control share acquisition provisions, shares of a corporation with more
than 300 shareholders acquired in a "control share acquisition" generally have
no voting rights unless such rights are conferred to the acquiror by a vote of
non-interested shareholders. A "control share acquisition" is defined,
generally, as the direct or indirect acquisition of beneficial ownership of
voting shares which would cause the acquiror to have the power to vote or direct
the voting shares having the voting power within the following ranges in an
election of directors: (i) one-fifth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority or more, of such
votes. If voting rights are conferred to the acquiror by the shareholders of the
target corporation, the acquisition of additional voting shares by the acquiror
is not an additional control share acquisition unless such acquisition gives the
acquiror voting rights in excess of the range in which voting rights had
previously been granted.
The Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. At each annual meeting of shareholders,
the number of directors in the applicable class are elected for a three-year
term to succeed the directors of the same class whose terms are then expiring.
The terms of the Class I Directors, Class II Directors and Class III Directors
will expire upon the election and qualification of successor directors at the
annual meeting of shareholders held in calendar years 1999, 1997 and 1998,
respectively. These staggered three-year terms may make it more difficult for a
third party to gain control of the Company's Board of Directors.
As allowed by Article 9 of the VSCA, the Company's Amended and Restated
Articles of Incorporation eliminate the liability of the officers and directors
of the Company for monetary damages in any proceeding brought by or in the right
of the Company or brought by or on behalf of shareholders of the Company except
in cases of willful misconduct or a knowing violation of criminal law or any
federal or state securities law. As allowed by Article 10 of the VSCA, the
Company's Amended and Restated Articles of Incorporation also provide for
mandatory indemnification of any director or officer of the Company who is, was,
or is threatened to be made a party to a proceeding (including a proceeding by
or in the right of the Company) because (i) he or she is or was a director or
officer of the Company or (ii) he or she is or was serving the Company or other
legal entity in any capacity at the request of the Company while a director or
officer of the Company, against all liabilities and expenses incurred in
connection with such proceeding, except such liabilities as are incurred because
of such individual's willful misconduct or knowing violation of the criminal
law. In addition, the Company's Amended and Restated Articles of Incorporation
expressly authorize the Company to enter into agreements to indemnify its
officers and directors to the fullest extent permitted by the Amended and
Restated Articles of Incorporation and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
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<PAGE> 54
The Company's Amended and Restated By-Laws provide that special meetings of
shareholders may be called in accordance with the VSCA, which provides that,
with respect to a Virginia corporation with over 35 shareholders, such meetings
may be called only by the Chairman of the Board of Directors, the President or
the Board of Directors of the Company. The Company's Amended and Restated
By-Laws also provide that the only business that may be brought before a meeting
of shareholders is limited to that described in the notice prepared by officers
of the Company. These provisions could have the effect of delaying shareholder
actions which are favored by the holders of a majority of the outstanding voting
securities of the Company, would be unable to call a special meeting of
shareholders to take action as a shareholder (such as electing new directors or
approving a merger).
The Company's Amended and Restated Articles of Incorporation and Amended
and Restated By-Laws require the affirmative vote of the holders of over
two-thirds of the outstanding voting stock of the Company to amend or repeal any
of the foregoing provisions. Such shareholder vote would be in addition to any
separate class vote that might in the future be required by the Board of
Directors pursuant to the terms of any Preferred Stock that might be outstanding
at the time any such changes are submitted to shareholders.
REGISTRATION RIGHTS
In the event the Company proposes to register any of its securities under
the Securities Act, for its own account or otherwise at any time or times, the
holders of approximately 6,735,433 shares (the "Registrable Shares") of Common
Stock (or shares issuable upon the exercise of warrants) or certain of their
permitted transferees are entitled to notice of such registration and to include
shares of such Common Stock therein, subject to certain conditions and
limitations. The Company is generally required to bear the expenses of all such
registrations (except underwriting discounts and commissions). The Company is
required to use its good faith efforts to effect such registrations, subject to
certain conditions and limitations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Boston
EquiServe.
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<PAGE> 55
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 10,865,722 shares
of Common Stock outstanding (assuming no exercise of outstanding options) see
"Description of Capital Stock -- Common Stock." Of these shares, the 3,650,000
shares of Common Stock sold in this offering (assuming no exercise of the
Underwriters' over-allotment option) will be freely tradable in the public
market without restriction under the Securities Act, except that any shares
purchased by "affiliates" of the Company, as that term is defined in Rule 144
adopted under the Securities Act ("Affiliates"), may generally only be sold in
compliance with the applicable provisions of Rule 144.
The remaining shares are deemed "Restricted Securities" under Rule 144 in
that they were originally issued and sold by the Company in private transactions
in reliance upon exemptions from the Securities Act. Of the Restricted
Securities, approximately 827,673 shares may be eligible for sale in the public
market immediately after this offering pursuant to Rule 144(k) under the
Securities Act; of these, 393,834 are subject to 180-day Lock-up Agreements as
described below. Approximately 6,382,383 additional Restricted Securities will
become eligible for sale in the public market pursuant to Rule 144 or Rule 701
under the Securities Act beginning 90 days after the date of this Prospectus; of
these, 4,319,610 are subject to Lock-up Agreements. The additional 5,666
Restricted Securities will become eligible for sale in the public market from
time to time; of these, 3,287 are subject to Lock-up Agreements.
The Company, its officers, and directors, the Selling Shareholders and
certain other shareholders of the Company, who in the aggregate will hold
4,713,444 shares of Common Stock upon completion of this offering, have agreed
pursuant to certain agreements (the "Lock-up Agreements") that they will not,
without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of any of their shares for a period of 180 days from the date
of this Prospectus. The shares subject to the Lock-up Agreements include 393,834
and 4,319,610 shares, respectively, that would otherwise have been immediately
eligible or eligible within 90 days from the date of this Prospectus, for resale
in the public market without restriction upon completion of this offering
(subject to compliance with Rule 144 by Affiliates).
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Securities for at least one year from the later of the date such
restricted securities were acquired from the Company or the date they were
acquired from an Affiliate, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of the Common Stock (approximately 106,000 shares immediately after this
offering) or the average weekly trading volume in the Common Stock in the
over-the-counter market during the four calendar weeks preceding the date on
which notice of such sale was filed under Rule 144. Sales under Rule 144 are
also subject to certain provisions relating to the manner and notice of sale and
availability of current public information about the Company. Affiliates may
sell shares not constituting Restricted Securities in accordance with the
foregoing volume limitations and other restrictions, but without regard to the
one-year holding period.
Further, under Rule 144(k), after two years have elapsed from the later of
the date Restricted Securities were acquired from the Company and the date they
were acquired from an Affiliate, a holder of such Restricted Securities who is
not an Affiliate at the time of the sale and has not been an Affiliate for at
least three months prior to the sale would be entitled to sell the shares
immediately without regard to the volume limitations and other conditions
described above.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701 under the Securities
Act, which permits non-Affiliates to sell their Rule 701 shares without having
to comply with the public information, holding period, volume limitation or
notice provisions of Rule 144 and permits Affiliates to sell their Rule 701
shares without having to comply with Rule 144's holding period restrictions, in
each case commencing 90 days after the date of this Prospectus.
54
<PAGE> 56
The Company intends to file S-8 registration statements under the
Securities Act to register all shares of Common Stock subject to the Company's
1988 Option Plan, 1992 Option Plan, 1997 Incentive Plan, Director Plan and
Purchase Plan, which do not qualify for exemption from the registration
requirements of the Securities Act. The Company expects to file these
registration statements as soon as practicable after the closing of this
offering and such registration statements are expected to become effective upon
filing. Shares covered by these registration statements will be eligible for
sale in the public market after the effective dates of such registration
statements, subject to the Lock-up Agreements, if applicable.
Prior to this offering, there has been no public market for the Common
Stock of the Company, and no precise prediction can be made as to the effect, if
any, that market sales of shares of Common Stock or the availability of shares
of Common Stock for sale will have on the market price of the Common Stock
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock of the Company in the public market could adversely affect
prevailing market prices and could impair the Company's future ability to raise
capital through the sale of its equity securities.
The Company has granted registration rights to certain of its shareholders.
See "Description of Capital Stock -- Registration Rights."
55
<PAGE> 57
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC
and William Blair & Company, L.L.C., have severally agreed to purchase from the
Company and the Selling Shareholders the following respective number of shares
of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
----------------------------------------------------------------- ---------
<S> <C>
Hambrecht & Quist LLC............................................
William Blair & Company, L.L.C...................................
---------
Total............................................................ 3,650,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend to
confirm sales to accounts over which they exercise discretionary authority.
The Selling Shareholders have granted to the Underwriters an option,
exercisable no later than 30 days after the date of this Prospectus, to purchase
up to 547,500 additional shares of Common Stock at the initial public offering
price, less the underwriting discount, set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise this option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased by
it shown in the above table bears to the total number of shares of Common Stock
offered hereby. The Selling Shareholders will be obligated, pursuant to the
option, to sell shares to the Underwriters to the extent the option is
exercised. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of shares of Common Stock
offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Selling Shareholders, and certain other shareholders of the Company,
including the officers and directors, who will own in aggregate 4,713,444 shares
of Common Stock after the offering, have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, offer, sell, or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common
56
<PAGE> 58
Stock or securities exchangeable for or convertible into shares of Common Stock
owned by them during the 180-day period following the date of this Prospectus.
The Company has agreed that it will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock during the 180-day
period following the date of this Prospectus, except that the Company may issue
shares upon the exercise of options granted prior to the date hereof, and may
grant additional options under its stock option plans, provided that, without
the prior written consent of Hambrecht & Quist LLC, such additional options
shall not be exercisable during such period.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price are prevailing
market and economic conditions, revenue and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this preliminary prospectus is subject to change as a
result of market conditions and other factors.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock of the Company at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting of any purchase, for the purpose of
pegging, fixing or maintaining the price of the Common Stock of the Company. A
syndicate covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the Underwriters to reclaim a selling concession from a
syndicate member in connection with the offering when the Common Stock of the
Company sold by the syndicate member is purchased in syndicate covering
transactions. Such transactions may be effected on the Nasdaq National Market,
in the over-the-counter market, or otherwise. Such stabilizing, if commenced,
may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of the Common Stock offered hereby will be
passed upon for the Company by Hale and Dorr LLP, Washington, D.C. Certain legal
matters relating to the sale of the Common Stock offered hereby will be passed
upon for the Underwriters by Brobeck, Phleger & Harrison LLP, New York, New
York.
EXPERTS
The audited financial statements and schedule of the Company included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
57
<PAGE> 59
ADDITIONAL INFORMATION
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by an independent accounting firm and
will make available copies of quarterly reports containing unaudited financial
information for the first three quarters of each fiscal year.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 (including all amendments
thereto, the "Registration Statement") under the Securities Act with respect to
the Common Stock offered hereby. As permitted by the rules and regulations of
the Commission, this Prospectus omits certain information contained in the
Registration Statement. For further information with respect to the Company and
the Common Stock offered hereby, reference is hereby made to the Registration
Statement and to the exhibits and schedules filed therewith. Statements
contained in this Prospectus regarding the contents of any agreement or other
document filed as an exhibit to the Registration Statement are not necessarily
complete, and in each instance reference is made to the copy of such agreement
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, may be inspected at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from such office upon payment of the prescribed fees. The Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov.
58
<PAGE> 60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets
As of March 31, 1996 and 1997 and as of June 30, 1997 (Unaudited)................... F-3
Consolidated Statements of Operations
For the Years Ended March 31, 1995, 1996 and 1997 and for the Three Months Ended
June 30, 1996 and 1997 (Unaudited)............................................... F-4
Consolidated Statements of Shareholders' Deficit
For the Years Ended March 31, 1995, 1996 and 1997 and for the Three Months Ended
June 30, 1997 (Unaudited)........................................................ F-5
Consolidated Statements of Cash Flows
For the Years Ended March 31, 1995, 1996 and 1997 and for the Three Months Ended
June 30, 1996 and 1997 (Unaudited)............................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Best Software, Inc.:
We have audited the accompanying consolidated balance sheets of Best
Software, Inc., a Virginia corporation, and subsidiaries as of March 31, 1996
and 1997, and the related consolidated statements of operations, shareholders'
deficit and cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Best Software, Inc. and
subsidiaries as of March 31, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
August 6, 1997 (except with
respect to the increase in
authorized shares discussed in
Note 1, as to which the date is
September 11, 1997)
F-2
<PAGE> 62
BEST SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, PRO FORMA
------------------------- JUNE 30, JUNE 30,
1996 1997 1997 1997
----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 8,105,231 $13,364,929 $7,428,808
Accounts receivable, net of allowance ($1,506,951,
$832,059, and $1,345,766, respectively).......... 4,035,502 2,123,716 3,401,903
Inventory.......................................... 564,025 182,795 221,010
Prepaid expenses and other current assets.......... 622,099 895,295 1,373,549
Deferred tax asset................................. 500,000 350,000 350,000
----------- ----------- -----------
Total............................................ 13,826,857 16,916,735 12,775,270
----------- ----------- -----------
Property and equipment, net.......................... 1,951,520 1,774,051 1,557,408
Deferred tax asset................................... 1,800,000 2,450,000 2,450,000
Other assets......................................... 47,009 18,978 32,487
----------- ----------- -----------
Total............................................ $17,625,386 $21,159,764 $16,815,165
============ ============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................... $ 1,811,961 $1,949,012 $2,286,313
Accrued expenses................................... 3,378,684 4,570,914 5,634,107
Notes payable...................................... 666,667 650,000 650,000
Deferred maintenance and service revenue........... 8,412,635 10,605,545 11,915,891
Obligations under capital leases................... 139,612 54,321 31,472
----------- ----------- -----------
Total............................................ 14,409,559 17,829,792 20,517,783
----------- ----------- -----------
Notes payable, net of current portion................ 2,133,333 650,000 650,000
Deferred maintenance and service revenue............. 984,960 1,682,704 1,716,025
----------- ----------- -----------
Total liabilities........................... 17,527,852 20,162,496 22,883,808
----------- ----------- -----------
Commitments and contingencies (Notes 5, 7, 8 and 9)
Redeemable convertible preferred stock:
Class A preferred stock, $0.01 par value; 41,667
shares authorized, issued and outstanding at
March 31, 1996 and 1997 and June 30, 1997,
convertible into 625,005 shares of common stock
upon the closing of an initial public offering
(at liquidation value)........................... 500,000 500,000 500,000 $ --
Redeemable common stock warrants..................... 295,529 641,627 792,033 --
Shareholders' deficit:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued.......................... -- -- -- --
Common stock, no par value; 40,000,000 shares
authorized; 6,529,579, 6,979,483, 7,435,023 and
8,115,722 issued and outstanding, respectively... 199,984 454,622 785,332 1,490,799
Additional paid-in capital......................... 749,321 227,676 -- 699,569
Deferred compensation.............................. (77,000) -- -- --
Accumulated deficit................................ (1,570,300) (826,657) (8,146,008) (8,146,008)
----------- ----------- ----------- ------------
Total shareholders' deficit................. (697,995) (144,359) (7,360,676) $(5,955,640)
============
----------- ----------- -----------
Total................................... $17,625,386 $21,159,764 $16,815,165
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 63
BEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License fees and royalty....... $20,346,229 $22,677,174 $20,161,436 $5,064,440 $ 5,357,634
Services....................... 14,676,917 16,552,398 19,322,987 4,434,515 5,288,451
----------- ----------- ----------- ---------- -----------
Total....................... 35,023,146 39,229,572 39,484,423 9,498,955 10,646,085
----------- ----------- ----------- ---------- -----------
Cost of revenue:
License fees and royalty....... 3,805,771 4,501,351 2,251,124 577,128 371,139
Services....................... 4,356,988 5,305,877 5,675,381 1,513,987 1,470,336
----------- ----------- ----------- ---------- -----------
Total....................... 8,162,759 9,807,228 7,926,505 2,091,115 1,841,475
----------- ----------- ----------- ---------- -----------
Gross margin..................... 26,860,387 29,422,344 31,557,918 7,407,840 8,804,610
----------- ----------- ----------- ---------- -----------
Operating expenses:
Sales and marketing............ 11,353,573 12,811,982 14,355,197 3,953,911 4,304,933
Research and development....... 5,707,290 7,388,807 6,088,730 1,816,864 2,048,326
General and administrative..... 4,284,967 5,789,546 5,553,895 1,523,445 1,584,686
Amortization of acquired
intangibles................. 3,176,901 1,434,861 -- -- --
----------- ----------- ----------- ---------- -----------
Total....................... 24,522,731 27,425,196 25,997,822 7,294,220 7,937,945
----------- ----------- ----------- ---------- -----------
Operating income............... 2,337,656 1,997,148 5,560,096 113,620 866,665
Other income (expense):
Interest income (expense),
net......................... (175,806) (145,082) 351,311 10,994 (293,067)
Gain on sale of product
lines....................... -- 750,000 -- -- --
----------- ----------- ----------- ---------- -----------
Total....................... (175,806) 604,918 351,311 10,994 (293,067)
Income from continuing
operations before income
taxes.......................... 2,161,850 2,602,066 5,911,407 124,614 573,598
Income tax benefit (provision)... (550,000) 925,000 (1,475,000) (45,000) (225,000)
----------- ----------- ----------- ---------- -----------
Income from continuing
operations..................... 1,611,850 3,527,066 4,436,407 79,614 348,598
Gain on disposal of discontinued
business, net of income tax
provision of $625,000.......... 1,902,965 -- -- -- --
----------- ----------- ----------- ---------- -----------
Net income....................... 3,514,815 3,527,066 4,436,407 79,614 348,598
Less accretion (Note 8).......... (31,500) (89,250) (136,500) (22,313) (68,250)
----------- ----------- ----------- ---------- -----------
Net income available to common
shareholders................... $ 3,483,315 $ 3,437,816 $ 4,299,907 $ 57,301 $ 280,348
=========== =========== =========== ========== ===========
Pro forma net income per share
(unaudited).................... $ 0.45 $ 0.04
=========== ===========
Pro forma weighted average
shares outstanding
(unaudited).................... 9,808,786 9,884,653
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 64
BEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
REDEEMABLE SHAREHOLDERS' DEFICIT
COMMON -----------------------------------------------------------------
REDEEMABLE STOCK NUMBER OF ADDITIONAL
PREFERRED PURCHASE COMMON COMMON PAID-IN DEFERRED ACCUMULATED
STOCK WARRANTS SHARES STOCK CAPITAL COMPENSATION DEFICIT
----------- ---------- --------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994......... $ 500,000 $ 206,279 6,496,279 $ 177,214 $ 750,091 $ (167,457) $(8,522,931)
Exercise of stock options
including tax benefit of
$1,290...................... -- -- 7,050 6,290 1,290 -- --
Compensation expense
associated with stock
options..................... -- -- -- -- -- 39,000 --
Cancellation of stock
options..................... -- -- -- -- (11,457) 11,457 --
Net income.............. -- -- -- -- -- -- 3,514,815
----------- ---------- --------- ---------- ----------- ------------ -----------
Balance, March 31, 1995......... 500,000 206,279 6,503,329 183,504 739,924 (117,000) (5,008,116)
Exercise of stock options
including tax benefit of
$10,605..................... -- -- 26,250 16,480 10,605 -- --
Compensation associated with
stock options............... -- -- -- -- -- 38,792 --
Cancellation of stock
options..................... -- -- -- -- (1,208) 1,208 --
Redemption value of warrants
in excess of carrying
value....................... -- 89,250 -- -- -- -- (89,250)
Net income.............. -- -- -- -- -- -- 3,527,066
----------- ---------- --------- ---------- ----------- ------------ -----------
Balance, March 31, 1996......... 500,000 295,529 6,529,579 199,984 749,321 (77,000) (1,570,300)
Exercise of stock options
including tax benefit of
$560,389.................... -- -- 758,071 511,435 560,389 -- --
Compensation associated with
stock options............... -- -- -- -- -- 6,416 --
Purchase and retirement of
treasury stock.............. -- -- (310,792) (270,272) (1,011,450) -- --
Exercise of common stock
purchase warrants........... -- (5,390) 2,625 13,475 -- -- --
Cancellation of stock
options..................... -- -- -- -- (70,584) 70,584 --
Payment of dividend........... -- -- -- -- -- -- (3,556,264)
Redemption value of warrants
in excess of carrying
value....................... 136,500 -- -- -- -- (136,500)
Modification of warrant....... -- 214,988 -- -- -- -- --
Net income.............. -- -- -- -- -- -- 4,436,407
----------- ---------- --------- ---------- ----------- ------------ -----------
Balance, March 31, 1997......... 500,000 641,627 6,979,483 454,622 227,676 -- (826,657)
Exercise of stock options
including tax benefit of
$538,405 (unaudited)........ -- -- 670,491 351,284 538,405 -- --
Purchase and retirement of
treasury stock
(unaudited)................. -- -- (217,051) (31,354) (766,081) -- (34,585)
Exercise of common stock
purchase warrants
(unaudited)................. -- (4,312) 2,100 10,780 -- -- --
Payment of dividend
(unaudited)................. -- -- -- -- -- -- (7,565,114)
Redemption value of warrants
in excess of carrying value
(unaudited)................. -- 68,250 -- -- -- -- (68,250)
Modification of warrant
(unaudited)................. -- 86,468 -- -- -- -- --
Net income (unaudited).. -- -- -- -- -- -- 348,598
----------- ---------- --------- ---------- ----------- ------------ -----------
Balance, June 30, 1997
(unaudited)................... 500,000 792,033 7,435,023 785,332 -- -- (8,146,008)
----------- ---------- --------- ---------- ----------- ------------ -----------
Pro forma adjustments (Note 1)
(unaudited)................... (500,000) (792,033) 680,699 705,467 699,569 -- --
----------- ---------- --------- ---------- ----------- ------------ -----------
Pro forma balance, June 30, 1997
(unaudited)................... $ -- $ -- 8,115,722 $1,490,799 $ 699,569 $ -- $(8,146,008)
========== ========== ========= ========= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 65
BEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
--------------------------------------- ---------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income........................................ $ 3,514,815 $ 3,527,066 $ 4,436,407 $ 79,614 $ 348,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of discontinued tax business... (1,902,965) -- -- -- --
Gain on sale of product lines................... -- (750,000) -- -- --
Depreciation and amortization................... 5,476,358 3,779,557 1,288,138 326,349 365,875
Compensation associated with stock options...... 39,000 38,792 6,416 6,416 --
Modification of warrants and amortization of
debt discount................................. 131,244 -- 214,988 -- 86,468
Tax benefit from option exercises............... 1,290 10,605 560,389 -- 538,405
Deferred tax asset.............................. -- (2,300,000) (500,000) 500,000 --
(Increase) decrease in assets:
Accounts receivable............................. (1,283,425) 95,563 1,911,786 397,190 (1,278,187)
Inventory....................................... (150,473) (42,963) 381,230 313,495 (38,215)
Prepaid expenses and other assets............... 1,505,085 (359,287) (245,165) (1,241,599) (491,767)
Increase (decrease) in liabilities:
Accounts payable................................ (264,203) 89,335 137,051 499,958 337,301
Accrued expenses................................ (3,247,753) 247,212 1,192,230 (700,984) 1,063,193
Deferred maintenance and service revenue........ 826,977 583,959 2,890,654 1,387,167 1,343,666
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities.............................. 4,645,950 4,919,839 12,274,124 1,567,606 2,275,337
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Net proceeds from disposal of discontinued
business...................................... 4,684,385 -- -- -- --
Net proceeds from sale of product lines......... -- 1,609,000 -- -- --
Net proceeds from sale of property and
equipment..................................... -- -- 185,000 -- --
Purchases of property and equipment............. (465,565) (793,105) (1,295,667) (317,691) (149,231)
Investment in software development costs........ (126,054) -- -- -- --
Buyout of product rights........................ (577,000) (429,586) -- -- --
Acquisitions.................................... (3,289,608) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. 226,158 386,309 (1,110,667) (317,691) (149,231)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable...................... 2,000,000 -- -- -- --
Repayment of notes payable...................... (3,538,071) (675,000) (1,500,000) (166,666) --
Payments on line of credit...................... (1,500,000) -- -- -- --
Cash dividends paid to shareholders............. -- -- (3,556,264) -- (7,565,114)
Proceeds from exercise of stock options and
warrants...................................... 6,290 16,480 519,518 -- 357,757
Purchase and retirement of treasury stock....... -- -- (1,281,722) -- (832,021)
Principal payments under capital lease
obligations................................... (68,246) (76,293) (85,291) (20,440) (22,849)
Redemption of warrants.......................... (307,700) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in financing activities..... (3,407,727) (734,813) (5,903,759) (187,106) (8,062,227)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... 1,464,381 4,571,335 5,259,698 1,062,809 (5,936,121)
Cash and cash equivalents, beginning of period.... 2,069,515 3,533,896 8,105,231 8,105,231 13,364,929
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period.......... $ 3,533,896 $ 8,105,231 $13,364,929 $ 9,168,040 $ 7,428,808
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 66
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND AS OF JUNE 30, 1997 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Best Software, Inc., is a provider of asset, human resources and payroll
management software solutions for middle market businesses.
The market for business application software is competitive and
characterized by ongoing technological advances. The success of the Company's
future results of operations is dependent upon, among other things, its ability
to adapt to technological developments and changing industry standards.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Best Software, Inc. and
its wholly owned subsidiaries. Best Software, Inc. and its wholly owned
subsidiaries are referred to as the "Company." Intercompany accounts and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue from software product licenses is recognized upon shipment of the
product, net of provisions for returns and allowances, provided that no
significant vendor obligations remain and that collection of the resulting
account receivable is probable.
For products with free trial periods, revenue is recognized upon acceptance
of the product by the customer. Revenue from software support agreements is
recognized pro rata over the term of the agreement, which is generally one year.
Revenue from services, such as training and consulting, is recognized as the
services are provided. Revenue from the Company's royalty license is recognized
ratably within each year of the term of the license agreement, based on
specified annual royalty payments.
The American Institute of Certified Public Accountants (the "AICPA")
approved for exposure a draft Statement of Position (the "SOP") that would
supersede SOP 91-1, "Software Revenue Recognition." If approved, the SOP would
need to be implemented for years beginning after December 15, 1997. The Company
believes that the proposed changes would not have a material financial impact on
the Company.
COST OF REVENUE
Direct product costs, royalties paid by the Company based on contractual
agreements, and amortization of capitalized software development costs
($1,218,020 and $1,161,361 for the years ended March 31, 1995 and 1996) are
included in cost of license fees and royalty revenue. Cost of services revenue
includes employee compensation and benefits, telephone charges and other costs
related to providing such services.
F-7
<PAGE> 67
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND AS OF JUNE 30, 1997 (UNAUDITED) -- (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturity dates of three months or less at the date of purchase.
INVENTORY
Inventory, consisting of software media, manuals and related packaging
materials, is stated at the lower of cost, determined on the first-in, first-out
("FIFO") basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated using the straight-line method over
the estimated useful lives of the assets, which range from three to five years.
Leasehold improvements are amortized over the shorter of the useful life of the
asset or the lease term.
INTELLECTUAL PROPERTY RIGHTS AND INTANGIBLES
For the years ended March 31, 1995 and 1996, amortization of intellectual
property rights and intangibles was $3,176,901 and $1,434,861. Intellectual
property rights and intangibles were fully amortized as of March 31, 1996.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Costs
incurred prior to establishment of technological feasibility are expensed as
incurred and reflected as research and development costs in the accompanying
statements of operations. All capitalized software development costs were fully
amortized as of March 31, 1996.
The Company capitalized software development costs of $126,000 in the
fiscal year ended March 31, 1995. There were no software development costs
capitalized in the fiscal years ended March 31, 1996 or 1997, or in the three
month period ended June 30, 1997. During these periods the time between the
establishment of technological feasibility and general release was very short.
Consequently, costs otherwise capitalizable after technological feasibility were
expensed as they were insignificant.
INCOME TAXES
The Company accounts for income taxes using the liability method as
prescribed by SFAS No. 109, "Accounting for Income Taxes."
CREDIT RISK
Accounts receivable consist of geographically dispersed customers and
include allowances to record receivables at their estimated net realizable
value. The Company maintains its cash and cash equivalents with high credit
quality financial institutions. Cash equivalents consist principally of U.S.
government agency securities and money market funds which invest in government
agency securities.
F-8
<PAGE> 68
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND AS OF JUNE 30, 1997 (UNAUDITED) -- (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for income taxes and interest was:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
---------------------------------- ---------------------------
1995 1996 1997 1996 1997
-------- ---------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income taxes................ $700,000 $1,250,000 $1,800,000 $650,000 $145,000
Interest.................... 575,000 250,000 160,000 80,000 460,000
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
During the three month period ended June 30, 1996, the Company sold certain
furniture and equipment in exchange for a $185,000 note receivable. The note was
paid during fiscal year 1997.
UNAUDITED PRO FORMA INFORMATION
The unaudited pro forma information is being presented to show the
mandatory conversion of the redeemable convertible preferred stock into common
stock upon a qualified initial public offering. If the initial public offering
is consummated under terms presently anticipated, all of the Company's preferred
stock outstanding will automatically convert into shares of its common stock.
The pro forma information also reflects the expiration of warrant redemption
rights and the partial exercise of a warrant that will occur immediately prior
to the closing of this offering. The holder of the warrant to purchase 472,500
shares of common stock has elected to partially exercise the warrant to purchase
55,694 shares of common stock. The Company will receive proceeds of $113,003
from the warrant exercise.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share has been computed based on the weighted
average number of common shares and common equivalent shares outstanding during
each period. Common equivalent shares outstanding include preferred stock, as
if-converted, and the common equivalent shares calculated for the stock options
and warrants using the treasury stock method for all periods presented.
Pursuant to accounting practices prescribed by the Securities and Exchange
Commission, common stock and common stock options issued within the twelve month
period prior to the proposed initial public offering at a price less than the
proposed public offering price have been included in the calculation of earnings
per share as if they were outstanding for all periods presented. The calculation
used the treasury stock method and a proposed offering price of $12.00 per
share, the midpoint of the proposed offering range. Pro forma net income per
share reflects the expiration of the warrant redemption rights and the assumed
partial exercise of the common stock warrant and the assumed issuance at an
offering price of $12.00 per share of a sufficient number of shares of common
stock to fund the dividends paid as of June 30, 1997 in excess of earnings.
Primary earnings per share are not presented because the difference between
these amounts and the amounts presented is not material.
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 is effective for
financial statements issued after December 15, 1997. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share. The Company believes the
presentation of diluted earnings per share will not materially differ from
earnings per
F-9
<PAGE> 69
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND AS OF JUNE 30, 1997 (UNAUDITED) -- (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
share as presently presented. Basic earnings per share includes no dilution and
is computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the period. The
Company's basic net income per share for the year ended March 31, 1997 and the
three months ended June 30, 1997 was $0.61 and $0.05, respectively, on a pro
forma basis.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company complies with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
reviews its long-lived assets, which consist primarily of property and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable. To
determine recoverability of its long-lived assets, the Company evaluates the
probability that future undiscounted net cash flows, without interest charges,
will be less than the carrying amount of the assets. Impairment is measured at
fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of current assets, current liabilities and notes
payable in the accompanying financial statements approximate fair value.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of June 30, 1997 and the
accompanying consolidated statements of operations and cash flows for the three
months ended June 30, 1996 and 1997 included herein have been prepared by the
Company and are unaudited. The information furnished in the unaudited financial
statements referred to above includes all adjustments which are, in the opinion
of management, necessary for a fair presentation of such financial statements.
The results of operations for the three months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the entire fiscal year.
INCREASE IN AUTHORIZED SHARES AND STOCK SPLIT
In August 1997, the Board of Directors approved a three-for-two stock split
and, subject to shareholders' approval, increased the authorized capital stock
of the Company to consist of 40,000,000 shares of common stock, no par value,
and 1,000,000 shares of preferred stock, $0.01 par value per share. All share
and per-share amounts in the accompanying financial statements have been
restated to reflect the stock split and increase in authorized shares.
On September 11, 1997, the shareholders approved the increase in authorized
shares.
RECLASSIFICATIONS
Certain reclassifications of prior year amounts have been made to conform
to the March 31, 1997 presentation.
2. SALE OF BUSINESS AND ASSETS
On April 6, 1994, in accordance with a plan established during fiscal 1993,
the Company sold its tax preparation software business for a cash payment of
$6.5 million. The Company recorded a pre-tax gain of approximately $2.5 million
after transaction expenses, or approximately $1.9 million after tax, in the year
ended March 31, 1995.
F-10
<PAGE> 70
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND AS OF JUNE 30, 1997 (UNAUDITED) -- (CONTINUED)
2. SALE OF BUSINESS AND ASSETS (CONTINUED)
In August 1995, the Company sold substantially all the assets related to
its service bureau payroll and write-up product lines for $1,609,000. A pre-tax
gain of $750,000 was recorded on this transaction.
Effective May 29, 1996, the Company licensed its small business accounting
product line in return for royalties, payable over a four-year license period.
Royalty income of $663,750 and $221,250 was recognized from this agreement and
is reflected as license fees and royalty in the accompanying statement of
operations during the year ended March 31, 1997 and the three months ended June
30, 1997, respectively. The Company does not anticipate generating any
additional revenue from this product line upon termination of the license
agreement in June 2000. The royalty is based on the total revenue of the
licensee attributable to this product line, with the royalty rate escalating
over each of the four years in the license period.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------------- JUNE 30,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Equipment and computer software................. $ 4,466,177 $ 5,059,248 $ 5,205,403
Furniture and fixtures.......................... 1,235,947 1,221,845 1,224,917
Leasehold improvements.......................... 537,058 520,552 520,557
Accumulated depreciation and amortization....... (4,287,662) (5,027,594) (5,393,469)
----------- ----------- -----------
Total................................. $ 1,951,520 $ 1,774,051 $ 1,557,408
========== ========== ==========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------- JUNE 30,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Compensation and benefits.......................... $1,513,783 $3,130,874 $4,166,406
Taxes, other than income........................... 582,314 313,685 301,120
Income taxes payable............................... 250,000 -- --
Royalties payable.................................. 193,469 156,109 110,336
Other.............................................. 839,118 970,246 1,056,245
---------- ---------- -----------
$3,378,684 $4,570,914 $5,634,107
========= ========= =========
</TABLE>
5. NOTES PAYABLE
The Company had a term loan outstanding of $1.5 million with interest of
9.25% at March 31, 1996. The note was paid in full and canceled in July 1996.
In connection with an acquisition in 1992, the Company issued an unsecured
subordinated promissory note for $1,300,000. The note requires principal
payments of $650,000 on July 1, 1997 and 1998. Interest accrues at 6.5% per
annum and is payable quarterly.
F-11
<PAGE> 71
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND AS OF JUNE 30, 1997 (UNAUDITED) -- (CONTINUED)
6. INCOME TAXES
The provision (benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------
1995 1996 1997
-------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal....................................... $440,000 $ 1,225,000 $ 1,745,000
State......................................... 110,000 150,000 230,000
-------- ----------- -----------
550,000 1,375,000 1,975,000
-------- ----------- -----------
Deferred:
Federal....................................... -- (305,000) 620,000
State......................................... -- (40,000) 80,000
-------- ----------- -----------
-- (345,000) 700,000
-------- ----------- -----------
Decrease in valuation allowance................. -- (1,955,000) (1,200,000)
-------- ----------- -----------
$550,000 $ (925,000) $ 1,475,000
======== ========== ==========
</TABLE>
Significant components of the Company's deferred tax assets consist of the
following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Tax credit carryovers...................................... $ 1,320,000 $ 175,000
Foreign net operating loss carryforwards................... -- 280,000
Intangible assets.......................................... 2,830,000 2,600,000
Depreciable assets......................................... 220,000 300,000
Other...................................................... 330,000 645,000
----------- -----------
Total deferred tax assets............................. 4,700,000 4,000,000
Valuation allowance................................... (2,400,000) (1,200,000)
----------- -----------
Net deferred tax asset........................... $ 2,300,000 $ 2,800,000
========== ==========
</TABLE>
The Company's tax credit carryforwards expire through 2009.
During fiscal 1996 and 1997, the valuation allowance for deferred tax
assets decreased by approximately $2.0 million and $1.2 million, respectively.
This was the result of the Company's reevaluation of its future forecasted
taxable income, and certain tax planning strategies. The remaining valuation
allowance relates to reversals of temporary differences, primarily relating to
the Company's intangible assets, expected to reverse in future years as to which
the Company is unable to make a judgement about the likelihood of realization
and the realization of foreign net operating loss carryforwards. The Company
believes it is more likely than not that all of the recorded net deferred tax
asset will be realized.
F-12
<PAGE> 72
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND AS OF JUNE 30, 1997 (UNAUDITED) -- (CONTINUED)
6. INCOME TAXES (CONTINUED)
The differences between the expected tax provision based on the federal
income statutory rate and the actual provision for the years ended March 31,
1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate...................................... 34.0% 34.0% 34.0%
State income taxes.......................................... 4.6 6.4 5.0
Change in valuation allowance............................... -- (80.1) (22.9)
Foreign operating losses not deductible in U.S.............. -- -- 5.0
Utilization of NOL carryforwards............................ (14.6) -- --
Other nondeductible items................................... 1.0 4.2 3.9
----- ----- -----
25.0% (35.5)% 25.0%
===== ===== =====
</TABLE>
7. SHAREHOLDERS' DEFICIT
EMPLOYEE STOCK OPTION PLAN
The Company has a nonqualified stock option plan for key employees. As of
March 31, 1997 and June 30, 1997, a total of 725,338 and 145,500 shares of
common stock, respectively, have been reserved for issuance under this plan.
Options are exercisable for a period of one to ten years from the date of grant.
In November 1992, the Company adopted a second stock option plan. A maximum
of 1,875,000 shares of common stock may be granted as either incentive stock
options or nonqualified options. The options are exercisable for a maximum of
ten years from the date of grant.
Any difference between the fair market value of the stock and the option
price at the date of grant is recorded as compensation expense over the vesting
period, which is generally 60 months. For options granted in fiscal 1997 and the
three months ended June 30, 1997, fair value was determined by independent
appraisal. As of March 31, 1997 and June 30, 1997, aggregate options available
for future
F-13
<PAGE> 73
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND AS OF JUNE 30, 1997 (UNAUDITED) -- (CONTINUED)
7. SHAREHOLDERS' DEFICIT (CONTINUED)
grant under the combined plans were 907,440 and 864,384, respectively. Option
activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTION EXPIRATION AVERAGE
PRICE PER DATE EXERCISE
OPTIONS SHARE (FISCAL YEAR) PRICE
--------- ----------- ------------- --------
<S> <C> <C> <C> <C>
Options outstanding at April 1, 1994..... 1,684,500 $0.07-$3.00 1998-2003 $ 0.61
Granted................................ 97,650 2.00-3.33 2.78
Canceled............................... (138,450) 0.33-3.33 1.59
Exercised.............................. (7,050) 0.57-1.13 0.89
---------
Options outstanding at March 31, 1995.... 1,636,650 0.07-3.33 1998-2004 0.65
Granted................................ 541,500 2.67-3.33 2.71
Canceled............................... (31,725) 1.13-3.33 2.30
Exercised.............................. (26,250) 0.57-3.33 0.63
---------
Options outstanding at March 31, 1996.... 2,120,175 0.07-3.33 1999-2005 1.15
Granted................................ 301,425 3.50-3.83 3.67
Canceled............................... (130,890) 2.00-3.83 2.91
Exercised.............................. (758,072) 0.07-3.33 0.67
---------
Options outstanding at March 31, 1997.... 1,532,638 0.07-3.83 1999-2006 1.73
Granted................................ 51,756 3.83 3.83
Canceled............................... (8,700) 3.50-3.83 3.56
Exercised.............................. (670,491) 0.07-3.50 0.53
---------
Options outstanding at June 30, 1997
(Unaudited)............................ 905,203 $0.33-$3.83 2000-2007 $ 2.74
========
</TABLE>
As of March 31, 1997 and June 30, 1997, options to purchase 788,563 and
228,742 shares of common stock were exercisable with a weighted average exercise
of $0.52 and $1.68, respectively. The weighted-average remaining contractual
life of options outstanding at March 31, 1997 and June 30, 1997 was 4.76 and
6.43 years, respectively.
In July 1997, the Company granted options to purchase 114,150 shares of
common stock at an exercise price of $8.00 per share. In connection with these
grants, the Company will record deferred compensation of approximately $135,000
in the quarter ended September 30, 1997, which will be amortized ratably over
the option vesting period of five years.
In August 1997, the Board of Directors adopted the 1997 Stock Incentive
Plan (the "1997 Incentive Plan"). The Company has reserved 1,500,000 shares of
common stock for issuance under the 1997 Incentive Plan. The 1997 Incentive Plan
provides that a variety of awards, including stock options, stock appreciation
rights and restricted and unrestricted stock grants, may be made to the
Company's employees, officers, consultants and advisors who are expected to
contribute to the Company's future growth and success.
In August 1997, the Board of Directors adopted the Company's 1997 Director
Stock Option Plan (the "Director Plan") to provide for the grant of
non-statutory stock options to outside directors. All options granted under the
Director Plan will have an exercise price equal to the fair market value of the
common stock on the date of grant. The Company has reserved 150,000 shares for
issuance under the Director Plan. No options have been granted under the
Director Plan to date.
F-14
<PAGE> 74
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND AS OF JUNE 30, 1997 (UNAUDITED) -- (CONTINUED)
7. SHAREHOLDERS' DEFICIT (CONTINUED)
The Company adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation", effective for the Company's March 31,
1997 financial statements. The Company applies Accounting Principles Boards
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans. Accordingly, compensation cost has
been recognized for its stock plans based on the intrinsic value of the stock
option at the date of the grant (i.e. the difference between the exercise price
and the fair value of the Company's stock). Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
SFAS No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Net income as reported....................................... $3,527,066 $4,436,407
Pro forma.................................................... 3,454,066 4,304,407
Earnings per share as reported............................... -- 0.45
Pro forma.................................................... -- 0.44
</TABLE>
The fair value of each option is estimated on the date of grant using the
minimum value method with the following assumptions used for grants in fiscal
1996 and 1997: no dividend yield, expected volatility of zero, risk-free
interest rates of approximately 6%, and expected lives of five years.
Because SFAS No. 123's method of accounting has not been applied to options
granted prior to April 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
8. REDEEMABLE SECURITIES
REDEEMABLE CONVERTIBLE CLASS A PREFERRED STOCK
Each share of Class A preferred stock has voting privileges equal to the
number of shares of common stock into which such preferred stock is convertible.
Each share is convertible, at the option of the holder at any time, into fifteen
shares of common stock, subject to the adjustment for certain dilutive effects.
In the event of liquidation, dissolution or winding up of the Company, Class A
preferred shareholders would be entitled to receive $12.00 per share in
preference to the common shareholders. The difference between the redemption
price and the initially recorded amount has been accreted. Upon the consummation
of a qualifying initial public offering of common stock, the preferred stock
will automatically be converted to common stock. The Class A preferred stock is
redeemable, at the option of the holder, for $12.00 per share on September 1 of
each calendar year, from 1993 to and including September 1, 2000, subject to
certain limitations as outlined in the articles of incorporation, including
restrictions on the number of shares which may be redeemed in any year.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
In connection with a subordinated debt financing, the Company issued a
warrant to purchase 472,500 common shares at $2.67 per share. The warrant
provides for adjustment of the warrant exercise price and/or the number of
shares issuable upon the exercise of the warrant in the event of dilutive
issuances of equity securities and have certain registration rights with respect
to shares issued in connection with the exercise or conversion of the warrants.
The warrant holder also has the right to require the Company to purchase all or
a portion of the common stock issuable upon the exercise of
F-15
<PAGE> 75
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND AS OF JUNE 30, 1997 (UNAUDITED) -- (CONTINUED)
8. REDEEMABLE SECURITIES (CONTINUED)
the warrant or actually issued pursuant to the warrant at any time after March
1998, or upon a merger or sale of a substantial portion of the Company's assets.
The purchase price, or put value, will be the value of the common stock at the
time of redemption or, in the case of a redemption of the warrant, the value of
the common stock less the warrant exercise price. The put right expires upon the
consummation of a qualifying public offering. The estimated redemption value of
the warrant is being accreted over the period to the redemption date (March
1998). During the year ended March 31, 1997 and three months ended June 30,
1997, the exercise price of the warrant was reduced to $2.21 and $2.03,
respectively, in exchange for the waiver of certain compliance provisions. The
value of the reduction in the exercise of the warrant price of $215,000 in the
year ended March 31, 1997, and $86,000 during the three months ended June 30,
1997, was recorded as interest expense.
During 1994, the Company issued warrants to purchase 8,415 shares of common
stock at $0.07 per share. The warrants are redeemable at $2.05 per warrant and
have been recorded at their redemption price. During the fiscal year ended March
31, 1997 and the three months ended June 30, 1997, 2,625 and 2,100 warrants were
redeemed, respectively. The put right expires in the event of an initial public
offering declared effective by December 23, 1997.
DIVIDENDS
The Company paid dividends of $3,556,264 and $7,565,114 ($0.455 and $0.915
per share) on February 28, 1997 and June 27, 1997, for shareholders of record as
of February 20, 1997 and June 27, 1997, respectively.
9. COMMITMENTS
The Company leases office space and office equipment under noncancelable
operating leases expiring through February 2002. Total rent expense for the
years ending March 31, 1995, 1996 and 1997 was approximately $1,120,000,
$1,310,000 and $1,290,000, respectively.
The Company also leases office equipment under capital leases with interest
rates ranging from 10.9% to 15.0% and terms expiring through October 1997. The
equipment has been capitalized at $369,000 with related accumulated amortization
on these assets of $352,000 and $279,000 as of March 31, 1997 and 1996,
respectively, and is included in property and equipment in the accompanying
consolidated financial statements.
Future minimum lease payments as of March 31, due under these leases are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1998......................................................... $ 56,000 $ 969,000
1999......................................................... -- 607,000
2000......................................................... -- 617,000
2001......................................................... -- 627,000
2002......................................................... -- 577,000
-------- ----------
56,000 $3,397,000
=========
Interest element of lease payment............................ (2,000)
--------
Present value of future lease payments....................... 54,000
Current portion.............................................. (54,000)
--------
Long-term portion............................................ $ --
========
</TABLE>
F-16
<PAGE> 76
BEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND AS OF JUNE 30, 1997 (UNAUDITED) -- (CONTINUED)
9. COMMITMENTS (CONTINUED)
The Company does not have any material commitments related to its royalty
obligations.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Retirement Savings Plan (the "Plan") for the
benefit of all employees who meet certain eligibility requirements. The Company
will make a matching contribution in an amount equal to $0.50 for each $1.00
contributed by an employee up to a maximum of 2% of the participant's
compensation as defined in the Plan. Company contributions made to the Plan for
the years ended March 31, 1995, 1996 and 1997 were approximately $178,000,
$141,000 and $159,000, respectively.
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors in August 1997. A total of 250,000
shares of common stock have been reserved for issuance under the Purchase Plan.
The Purchase Plan permits eligible employees to purchase common stock through
payroll deductions at a price equal to 85% of the lower of the fair market value
of the common stock on the first day of the offering period or the last day of
the offering period.
F-17
<PAGE> 77
[INSIDE BACK COVER FOR EDGAR FILING]
THE BEST SOLUTION
[A PHOTOGRAPH OF THE COMPANY'S PRODUCTS]
<PAGE> 78
==========================================================
==========================================================
==========================================================
==========================================================
I,2
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING
3,650,000 SHARES
SHAREHOLDER OR THE UNDERWRITERS. THIS
PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF
LOGO
AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL. NEITHER THE
COMMON STOCK
DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY
OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
-----------------------------------------------------------------
- ----------------------------------------------------------------
PROSPECTUS
-----------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Consolidated Financial
Data................................ 17
</TABLE>
HAMBRECHT & QUIST
<TABLE>
<S> <C>
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 29
Management............................ 41
Certain Transactions.................. 48
</TABLE>
WILLIAM BLAIR & COMPANY
<TABLE>
<S> <C>
Principal and Selling Shareholders.... 49
Description of Capital Stock.......... 51
Shares Eligible for Future Sale....... 54
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 57
Additional Information................ 57
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ----------------------------------------------------------------
UNTIL , 1997 (25 DAYS
AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN
THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF
, 1997
DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an estimate of the expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered, other than underwriting compensation:
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission............ $ 16,536
Filing Fee -- National Association of Securities Dealers, Inc..... 5,957
Listing Fee -- Nasdaq National Market............................. 47,033
Transfer Agent and Registrar Fees and Expenses.................... 2,500
Blue Sky Fees and Expenses........................................ 5,000
Legal Fees and Expenses........................................... 250,000
Accounting Fees and Expenses...................................... 175,000
Printing and Engraving Expenses................................... 130,000
Miscellaneous..................................................... 67,974
--------
Total............................................................. $700,000
========
</TABLE>
- ---------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 13.1-696 through 13.1-704 (the "Indemnification Statute") of the
Virginia Stock Corporation Act, as amended, provide a detailed statutory
framework covering indemnification of officers and directors against liabilities
and expenses arising out of legal proceedings brought against them by reason of
their being or having been directors or officers. The Indemnification Statute
generally provides that a director or officer of a corporation (i) shall be
indemnified by the corporation for all reasonable expenses of any such legal
proceeding if he entirely prevails in the defense of such proceeding and (ii)
may be indemnified by the corporation for the reasonable expenses, judgments,
fines, penalties and amounts paid in settlement of any such proceeding (other
than a derivative suit), even if he does not entirely prevail in such
proceeding, if (A) he conducted himself in good faith, (B) he believed, in the
case of conduct in his official capacity with the corporation, that his conduct
was in its best interests, (C) he believed, in all other cases, that his conduct
was at least not opposed to the corporation's best interest and (D) in the case
of any criminal proceeding, he had no reasonable cause to believe his conduct
was unlawful. No indemnification, however, may be made under clause (ii) above
if (A) in the case of a derivative suit (a suit brought in the name of the
corporation by a shareholder), the director or officer is adjudged liable in
such suit, unless a court determines that, despite such adjudication but
considering all the relevant circumstances, he is entitled to indemnification,
or (B) in the case of a proceeding charging improper personal benefit to him,
the director or officer is adjudged liable on the basis that personal benefit
was improperly received by him. In any event, in the case of a derivative suit,
indemnification is limited to reasonable expenses incurred by the officer or
director in connection with the proceeding. The indemnification described in
clause (ii) above may be made only upon a determination that indemnification is
permissible because the applicable standard of conduct has been met. Such a
determination may be made by a majority of a quorum of disinterested directors
(or, if such a quorum cannot be obtained, by a committee of two or more
disinterested directors), by independent legal counsel, by the shareholders or
by a court of competent jurisdiction.
The Indemnification Statute also provides that any corporation shall have
the power to make any further indemnity, including indemnity with respect to a
derivative suit, and including the advancement of expenses, to any director,
officer, employee or agent that may be authorized by the
II-1
<PAGE> 80
articles of incorporation or by any by-law made by the shareholders before or
after the event, except an indemnity against willful misconduct or a knowing
violation of the criminal law.
The indemnification of directors and officers is provided for by Article 5
of the Registrant's Amended and Restated Articles of Incorporation which
provides in substance that each director and officer shall be indemnified
against reasonable costs and expenses, including attorney's fees, and any
liabilities which he may incur in connection with any action to which he may be
made a party by reason of his being or having been a director or officer of the
Registrant, unless he engaged in willful misconduct or a knowing violation of
the criminal law. The indemnification provided by the Registrant's Amended and
Restated Articles of Incorporation is not deemed exclusive of or intended in any
way to limit any other rights to which any person seeking indemnification may be
entitled.
Section 7 of the Underwriting Agreement provides for indemnification by the
Underwriters of directors, officers and controlling persons of the Registrant
against certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"), under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The securities issued by the Registrant since April 1, 1994 which were not
registered under the Securities Act are listed below. All issuances of
securities reflect the three-for-two stock split of the Company's Common Stock
in the form of a stock dividend declared with respect to the Common Stock, to be
effected prior to the closing of the offering of shares to which this
Registration Statement applies.
(a) Issuances of Capital Stock.
Upon the closing of this offering, the Registrant will issue (A) an
aggregate of 625,005 shares of its Common Stock upon the automatic conversion of
all outstanding shares of its Preferred Stock and (B) 55,694 shares of Common
Stock upon the exercise of a warrant, which shares will be sold by a Selling
Shareholder in this offering.
(b) Grants and Exercises of Stock Options and Warrants
The Registrant's Employee Incentive Stock Option Plan was adopted by the
Board of Directors and approved by the shareholders on December 8, 1988. No
options to purchase shares of Common Stock have been granted under such plan
since April 1, 1994. Since April 1, 1994, the Registrant has issued 1,211,250
shares of Common Stock upon the exercise of options granted under this plan for
an aggregate consideration of $205,125.
The Registrant's 1992 Stock Option Plan was adopted by the Board of
Directors on November 13, 1992 and approved by the shareholders on December 11,
1992. Since April 1, 1994, options to purchase 1,098,980 shares have been
granted under such plan. As of July 31, 1997, options to purchase an aggregate
of 800,623 shares of Common Stock were outstanding under this plan and the
Registrant had issued 250,612 shares of Common Stock upon the exercise of
options granted under such Plan for an aggregate consideration of $680,361.
The Registrant's 1997 Employee Stock Purchase Plan was adopted by the Board
of Directors, subject to shareholder approval, on August 6, 1997. No stock has
been issued or options granted under this plan.
The Registrant's 1997 Stock Incentive Plan was adopted by the Board of
Directors, subject to shareholder approval, on August 6, 1997. No stock has been
issued or options granted under this plan.
The Registrant's 1997 Director Stock Option Plan was adopted by the Board
of Directors, subject to shareholder approval, on August 6, 1997. No stock has
been issued or options granted under this plan.
II-2
<PAGE> 81
Since April 1, 1994, the Company has issued 4,725 shares of Common Stock
upon the exercise of warrants for an aggregate consideration of $14,553.
No underwriters were involved in connection with the sales of securities
referred to in paragraph (a) or (b) of this Item 15. The shares of capital stock
issued in the above transactions were offered and sold in reliance upon the
exemption from registration under Section 4(2) of the Act, relative to sales by
an issuer not involving any public offering, or Rule 701 under the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------------------------------------------------------------------
<S> <C>
1.1 Proposed form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the Registrant, as amended.
3.2* Form of Articles of Amendment of Articles of Incorporation of the Registrant.
3.3* Form of Second Amended and Restated Articles of Incorporation of the Registrant to
be filed upon the closing of this offering.
3.4* Amended and Restated By-Laws of the Registrant.
4.1 Specimen certificate for shares of the Registrant's Common Stock.
5.1 Opinion of Hale and Dorr LLP.
10.1* Employee Incentive Stock Option Plan of the Registrant, as amended.
10.2* Amended and Restated 1992 Stock Option Plan of the Registrant.
10.3* 1997 Employee Stock Purchase Plan of the Registrant.
10.4* 1997 Stock Incentive Plan of the Registrant.
10.5* 1997 Director Stock Option Plan of the Registrant.
10.6* Loan and Warrant Purchase Agreement dated March 2, 1993 by and between PNC Capital
Corp. and the Registrant.
10.6A Amendment No. 1 to the Loan and Warrant Purchase Agreement.
10.7 Amended and Restated Common Stock Purchase Warrant dated March 24, 1993 held by PNC
Capital Corp.
10.8* Lease dated March 11, 1993, by and between HEM Corporation and the Registrant, as
amended.
10.9* Lease Agreement dated October 28, 1991, by and between Reston Investment Properties
Associates Limited Partnership and the Registrant, as amended.
10.10* Lease dated November 17, 1992 by and between Koger Management, Inc. and Abra
Cadabra Software, Inc., as amended.
10.11* Form of Shareholder Warrant.
10.12* Consolidating Registration Rights Agreement.
10.12A Form of Letter Agreement between the Registrant and James F. Petersen.
10.13*+ License Agreement dated May 28, 1996 between Best!Ware, Inc. and Data-Tech Software
Pty. Ltd.
10.14*+ Asset Purchase and Transition Agreement dated May 28, 1996 among Best!Ware, Inc.
(NJ), Best!Ware, Inc. (VA) and the Registrant.
10.15* Employment Agreement dated May 17, 1995 between the Registrant and James F.
Petersen.
10.16* Letter dated May 4, 1995, from the Registrant to Timothy A. Davenport.
10.17* Amendments to Warrant by and among PNC Capital Corp and the Registrant.
10.18* Shareholders Voting Agreement.
</TABLE>
II-3
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------------------------------------------------------------------
<S> <C>
11* Computation of Earnings Per Share.
21* Subsidiaries of the Registrant.
24.1 Consent of Hale and Dorr LLP (contained in Exhibit 5.1).
24.2 Consent of Arthur Andersen LLP.
25* Power of Attorney.
27* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted as the information required is inapplicable
or the information is presented in the financial statements or the related
notes.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions described in Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes (1) to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser, (2) that for purposes
of determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of a Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective and (3) that for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Reston,
Virginia, on the 25th day of September, 1997.
BEST SOFTWARE, INC.
By: /s/ TIMOTHY A. DAVENPORT
------------------------------------
Timothy A. Davenport,
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------------- -------------------
<C> <S> <C>
/s/ JAMES F. PETERSEN Chairman of the Board and September 25, 1997
- ------------------------------------- Director
James F. Petersen
/s/ TIMOTHY A. DAVENPORT President and Chief Executive September 25, 1997
- ------------------------------------- Officer and Director (Principal
Timothy A. Davenport Executive Officer)
/s/ DAVID N. BOSSERMAN Executive Vice President, Chief September 25, 1997
- ------------------------------------- Financial Officer and Treasurer
David N. Bosserman (Principal Financial and
Accounting Officer)
* Director September 25, 1997
- -------------------------------------
Herbert R. Brinberg
* Director September 25, 1997
- -------------------------------------
John H. Martinson
* Director September 25, 1997
- -------------------------------------
Richard Lefebvre
*By: /s/ DAVID N. BOSSERMAN
- -------------------------------------
David N. Bosserman
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 84
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Best Software, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Best Software, Inc., included in this Registration
Statement and have issued our report thereon dated August 6, 1997 (except with
respect to the increase in authorized shares discussed in Note 1, as to which
the date is September 11, 1997). Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedule
listed in the index is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
August 6, 1997 (except with
respect to the increase in
authorized shares discussed in
Note 1, as to which the date is
September 11, 1997).
S-1
<PAGE> 85
SCHEDULE II
BEST SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
AND THE THREE MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED
TO
REVENUE
BEGINNING DEDUCTIONS AND ENDING
BALANCE (1) EXPENSE BALANCE
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
March 31, 1995
Allowance for accounts receivable......... $ 765,149 $ (103,192) $420,799 $1,082,756
March 31, 1996
Allowance for accounts receivable......... 1,082,756 (313,625) 737,820 1,506,951
March 31, 1997
Allowance for accounts receivable......... 1,506,951 (866,361) 191,469 832,059
June 30, 1997 (unaudited)
Allowance for accounts receivable......... 832,059 (27,952) 541,659 1,345,766
</TABLE>
- ---------------
(1) Represents product returns, trade receivables written off, and credits
applied.
S-2
<PAGE> 86
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------ ----------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Proposed form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the Registrant, as
amended.
3.2* Form of Articles of Amendment of Articles of Incorporation of the
Registrant.
3.3* Form of Second Amended and Restated Articles of Incorporation of the
Registrant to be filed upon the closing of this offering.
3.4* Amended and Restated By-Laws of the Registrant.
4.1 Specimen certificate for shares of the Registrant's Common Stock.
5.1 Opinion of Hale and Dorr LLP.
10.1* Employee Incentive Stock Option Plan of the Registrant, as amended.
10.2* Amended and Restated 1992 Stock Option Plan of the Registrant.
10.3* 1997 Employee Stock Purchase Plan of the Registrant.
10.4* 1997 Stock Incentive Plan of the Registrant.
10.5* 1997 Director Stock Option Plan of the Registrant.
10.6* Loan and Warrant Purchase Agreement dated March 2, 1993 by and between
PNC Capital Corp. and the Registrant.
10.6A Amendment No. 1 to the Loan and Warrant Purchase Agreement.
10.7 Amended and Restated Common Stock Purchase Warrant dated March 24, 1993
held by PNC Capital Corp.
10.8* Lease dated March 11, 1993, by and between HEM Corporation and the
Registrant, as amended.
10.9* Lease Agreement dated October 28, 1991, by and between Reston
Investment Properties Associates Limited Partnership and the
Registrant, as amended.
10.10* Lease dated November 17, 1992 by and between Koger Management, Inc. and
Abra Cadabra Software, Inc., as amended.
10.11* Form of Shareholder Warrant.
10.12* Consolidating Registration Rights Agreement.
10.12A Form of Letter Agreement between the Registrant and James F. Petersen.
10.13*+ License Agreement dated May 28, 1996 between Best!Ware, Inc. and Data-
Tech Software Pty. Ltd.
10.14*+ Asset Purchase and Transition Agreement dated May 28, 1996 among
Best!Ware, Inc. (NJ), Best!Ware, Inc. (VA) and the Registrant.
10.15* Employment Agreement dated May 17, 1995 between the Registrant and
James F. Petersen.
10.16* Letter dated May 4, 1995, from the Registrant to Timothy A. Davenport.
10.17* Amendments to Warrant by and among PNC Capital Corp and the Registrant.
10.18* Shareholders Voting Agreement.
11* Computation of Earnings Per Share.
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------ ----------------------------------------------------------------------- ------------
<C> <S> <C>
21* Subsidiaries of the Registrant.
24.1 Consent of Hale and Dorr LLP (contained in Exhibit 5.1).
24.2 Consent of Arthur Andersen LLP.
25* Power of Attorney.
27* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested.
<PAGE> 1
EXHIBIT 1.1
BPHNY DRAFT 9/23/97
BEST SOFTWARE, INC.
3,650,000 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
September __, 1997
HAMBRECHT & QUIST LLC
WILLIAM BLAIR & COMPANY
c/o Hambrecht & Quist LLC
230 Park Avenue, 21st Floor
New York, New York 10169
LADIES AND GENTLEMEN:
Best Software, Inc., a Virginia corporation (herein called the
Company), proposes to issue and sell 2,750,000 shares of its authorized but
unissued Common Stock, no par value (herein called the Common Stock), and the
shareholders of the Company named in Schedule II hereto (herein collectively
called the Selling Shareholders) propose to sell an aggregate of 900,000 shares
of Common Stock of the Company (said 3,650,000 shares of Common Stock being
herein called the Underwritten Stock). The Selling Shareholders propose to
grant to the Underwriters (as hereinafter defined) an option to purchase up to
700,000 additional shares of Common Stock (herein called the Option Stock and
with the Underwritten Stock herein collectively called the Stock). The Common
Stock is more fully described in the Registration Statement and the Prospectus
hereinafter mentioned.
The Company and the Selling Shareholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with the
Securities and Exchange Commission (herein called the Commission) a
registration statement on Form S-1 (No. 333-33275), including the related
preliminary prospectus, for the registration under the Securities Act of 1933,
as amended (herein called the Securities Act), of the Stock. Copies of such
registration statement and of each amendment thereto, if any, including the
related preliminary prospectus (meeting the requirements of Rule 430A of the
rules and regulations of the Commission promulgated under the Securities Act
(herein called the Rules and Regulations)) heretofore filed by the Company with
the Commission have been delivered to you.
- -------------------------------------
(1) Plus an option to purchase from the Selling Shareholders up to 547,500
additional shares to cover over-allotments.
-1-
<PAGE> 2
The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the Rules and
Regulations with respect to the Stock (herein called a Rule 462(b) registration
statement), and, in the event of any amendment thereto after the effective date
of such registration statement (herein called the Effective Date), shall also
mean (from and after the effectiveness of such amendment) such registration
statement as so amended (including any Rule 462(b) registration statement).
The term Prospectus as used in this Agreement shall mean the prospectus
relating to the Stock first filed with the Commission pursuant to Rule 424(b)
and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to
such prospectus after the Effective Date, shall also mean (from and after the
filing with the Commission of such supplement or the effectiveness of such
amendment) such prospectus as so supplemented or amended. The term Preliminary
Prospectus as used in this Agreement shall mean each preliminary prospectus
included in such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND PRINCIPAL
SELLING SHAREHOLDERS.
(a) Each of the Company and James F. Petersen, individually
(herein called the Principal Selling Shareholder) hereby, jointly and
severally, represent and warrant as follows:
(i)The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of
the Commonwealth of Virginia, with corporate power and authority to
own or lease its properties and conduct its business as described in
the Registration Statement. Each of the subsidiaries of the Company
as listed in Exhibit 21 to the Registration Statement (herein
collectively called the Subsidiaries) has been duly organized and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement. The Subsidiaries are the
only subsidiaries (as defined in Rule 405 under the Securities Act),
direct or indirect, of the Company. The Company and each of the
Subsidiaries are duly qualified to transact business in all
jurisdiction in which the conduct of their business requires such
qualification, except for those jurisdictions in which the failure to
qualify would not have a material adverse effect upon the earnings,
business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and the
Subsidiaries taken as a whole. The outstanding shares of capital
stock of each of the Subsidiaries have been duly authorized and
validly issued and are fully paid and non- assessable. The capital
stock in such Subsidiaries are owned by the Company or another
Subsidiary free and clear of all liens, encumbrances and equities and
claims; and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert
any obligations into shares of capital stock or ownership interests in
the Subsidiaries are outstanding.
(ii)The outstanding shares of Common Stock of the
Company, including all Stock to be sold by the Selling Shareholders,
have been duly authorized and validly issued and are fully paid and
non-assessable; the Stock to be issued and sold by the Company have
been duly authorized and, when issued and paid for as contemplated
herein, will be validly issued, fully paid and non-assessable; and no
preemptive, co-sale, right of first refusal or other similar rights of
shareholders
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<PAGE> 3
exist with respect to any of the Stock or the issue and sale thereof.
Neither the filing of the Registration Statement nor the offering or
sale of the Stock as contemplated by this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock. Except as
described in the Prospectus, there are no contracts, agreements or
understandings between the Company and any person granting such person
the right to require the Company to file a registration statement
under the Securities Act with respect to any securities of the Company
owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant
to any other registration statement filed by the Company under the
Securities Act. Except as described in the Prospectus, there are no
outstanding subscriptions, rights, warrants, options, calls,
convertible securities, commitments of sale or liens related to or
entitling any person to purchase or otherwise to acquire any shares of
the capital stock of, or other ownership interest in, the Company.
(iii)The information set forth under the caption
"Capitalization" in the Prospectus is true and correct in all material
respects. All of the Stock conforms in all material respects to the
description thereof contained in the Registration Statement. The form
of certificates for the Stock conforms to the legal requirements of
the jurisdiction of the Company's incorporation.
(iv)The Commission has not issued an order preventing
or suspending the use of any Prospectus relating to the proposed
offering of the Stock, nor, to the best knowledge of the Company and
the Principal Selling Shareholder, instituted proceedings for that
purpose.
(v)The consolidated financial statements of the
Company and the Subsidiaries, together with related notes and
schedules as set forth in the Registration Statement, present fairly,
in all material respects, the consolidated financial position and the
results of operations and cash flows of the Company and the
Subsidiaries, at the indicated dates and for the indicated periods.
Such financial statements and related schedules have been prepared in
accordance with the generally accepted principles of accounting,
consistently applied throughout the periods involved, and all
adjustments necessary for a fair presentation of results for such
periods have been made. The summary and selected financial and
statistical data included in the Registration Statement presents
fairly the information shown therein and such data has been compiled
on a basis consistent with the financial statements presented therein
and the books and records of the Company.
(vi)Arthur Andersen LLP, who have certified certain
of the financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required
by the Securities Act and the Rules and Regulations.
(vii)There is no action, suit, claim or proceeding
pending, or, to the knowledge of the Company, threatened against the
Company or any of the Subsidiaries, or any of their respective
officers or properties, before any court or administrative agency or
otherwise, which if determined adversely to the Company or any of the
Subsidiaries could reasonably be expected to result in any material
adverse change in the earnings, business, management, properties,
assets, right, operations, condition (financial or otherwise) or
prospects of the Company and the Subsidiaries taken as a whole or
prevent the consummation of the transactions contemplated hereby; and
there are no agreements, contracts, leases or documents of the Company
or any of the Subsidiaries of a character required to be described or
referred to in the Registration Statement or Prospectus or to be filed
as an exhibit to the Registration Statement by the Securities Act or
the Rules and Regulations which have not been accurately described in
all material respects or referred to in the Registration Statement or
Prospectus or filed as exhibits to the Registration Statement. The
contracts so
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<PAGE> 4
described in the Registration Statement and Prospectus are in full
force and effect on the date hereof, and neither the Company nor any
of the Subsidiaries, nor, to the best of the Company's knowledge, any
other party, is in breach of or default under any of such contracts.
(viii)The Company and the Subsidiaries have good
and marketable title to all of the properties and assets reflected in
the financial statements (or as described in the Registration
Statement) filed with the Commission as part of the Registration
Statement, free and clear of any lien, mortgage, pledge, charge or
encumbrance of any kind except those reflected in such financial
statements (or as described in the Registration Statement). All
leases to which the Company or any Subsidiary is a party are valid and
binding obligations of the Company or the Subsidiary, as the case may
be, and no default by the Company or any Subsidiary has occurred or is
continuing thereunder which could reasonably be expected to result in
any material adverse change in the earnings, business, management,
properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a
whole, and the Company and each Subsidiary enjoy peaceful and
undisturbed possession under all such leases to which it is a party as
lessee.
(ix)The Company and the Subsidiaries have timely
filed all federal, state, local and foreign income tax returns which
have been required to be filed and have paid all taxes indicted by
said returns and all assessments received by them or any of them to
the extent that such taxes have become due and are not being contested
in good faith. All tax liabilities (including those being contested
in good faith) for the periods covered by the financial statements of
the Company that are included in the Registration Statement have been
adequately provided for in such financial statements.
(x)Since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
there has not been any material adverse change or any development
involving a prospective material adverse change in or affecting the
earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole, whether or not
occurring in the ordinary course of business, and there has not been
any material transaction entered into or any material transaction that
is probable of being entered into by the Company or any Subsidiary,
other than transactions in the ordinary course of business and changes
and transactions described in the Registration Statement and the
Prospectus, as each may be amended or supplemented. The Company and
the Subsidiaries have no material contingent obligations which are not
disclosed or provided for in the Company's consolidated financial
statements that are included in the Registration Statement.
(xi)This Agreement has been duly authorized, executed
and delivered by the Company an is a valid and binding agreement of
the Company, enforceable in accordance with its terms except insofar
as indemnification and contribution provisions may be limited by
applicable law or equitable principles and except as enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws relating to or affecting creditors' rights generally
or by general equitable principles.
(xii)Neither the Company nor any of the Subsidiaries
is, or with the giving of notice or lapse of time or both will be, in
violation of or in default under its Certificate or Articles of
Incorporation or Bylaws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or
by which it, or any of its properties, is bound and which default
would have material adverse effect on the earnings, business,
management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the
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<PAGE> 5
Subsidiaries taken as a whole. The execution and delivery of this
Agreement and the consummation of the transactions herein contemplated
and the fulfillment of the terms hereof will not conflict with or
result in a breach of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any Subsidiary is a
party, or of the Certificate or Articles of Incorporation or Bylaws of
the Company or, to the best knowledge of the Company and the Principal
Selling Shareholder, any law, order, rule or regulation, injunction,
judgement, or decree applicable to the Company or any Subsidiary of
any court or of any regulatory body or administrative agency or other
governmental body having jurisdiction over the Company or any
Subsidiary, which conflict, breach or default could have a material
adverse effect on the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and the Subsidiaries taken as a whole.
(xiii)Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body necessary in connection with
the execution and delivery by the Company of this Agreement and the
consummation of the transactions herein contemplated (except such
additional steps as may be required by the National Association of
Securities Dealers, Inc. (herein called the NASD) or such additional
steps as may be necessary to qualify the Stock for public offering by
the Underwriters under state securities or blue sky laws) has been
obtained or made and is in full force and effect.
(xiv)The Company and the Subsidiaries are operating
in compliance with all statutes, laws, regulations, ordinances or
court decrees applicable to their respective businesses and
operations, except where any such non-compliance would not have a
material adverse effect on the earnings, business, management,
properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a
whole. Neither the Company nor any Subsidiary has violated any
foreign, federal, state or local law or regulation relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants (herein called
Environmental Laws), or relating to discrimination in the hiring,
promotion or pay of, or to the wages and hours of, employees, except
for such violations as in the aggregate would not result in any
material adverse change in the earnings, business, management,
properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a
whole. To the best of Company's knowledge, no labor disturbance by
the employees of the Company or any of the Subsidiaries exists or is
imminent, and the Company is not aware of any existing or imminent
labor disturbance by the employees of any of its principal suppliers,
value added resellers, authorized dealers or distributors that might
be expected to result in a material adverse change in the earnings,
business, management, properties, assets, rights, operations,
condition (financial of otherwise) or prospects of the Company and the
Subsidiaries taken as a whole. No collective bargaining agreement
exists with any of the Company's employees and, to he best of the
Company's knowledge, no such agreement is imminent.
(xv)The Company is in compliance in all material
respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder (herein called
ERISA); no "reportable event" (as defined in ERISA) has occurred with
respect to any "pension plan" (as defined in ERISA) for which the
Company would have any liability; the Company has not incurred and
does not expect to incur liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended, including the regulations and published interpretation
thereunder (the Code); and each "pension
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<PAGE> 6
plan" for which the Company would have any liability that is intended
to be qualified under Section 401(a) of the Code is so qualified in
all material respects and nothing has occurred, whether by action or
by failure to act, that would cause the loss of such qualification.
(xvi)The Company and each of the Subsidiaries holds
all material licenses, certificate and permits from governmental
authorities that are necessary to the conduct of their businesses.
(xvii)The Company and each of the Subsidiaries owns
or possesses adequate rights to use all inventions, designs, computer
programs, computer code, communications protocols, security devices,
trade secrets, know-how, trademarks, service marks, trade names,
copyright works or other information (herein collectively called
Intellectual Property) which are necessary to conduct its businesses
as described in the Registration Statement and the Prospectus; the
Company and the Subsidiaries have not received any notice of, and have
no knowledge of, any infringement of or conflict with any rights of
the Company or any Subsidiary by others with respect to any
Intellectual Property which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a
material adverse effect on the earnings, business, management,
properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a
whole; the Company and the Subsidiaries have not received any notice
of, and have no knowledge of, any infringement of or conflict with any
rights of others with respect to any Intellectual Property which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the
earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole; to the Company's best
knowledge, none of the Intellectual Property licensed to or by the
Company or any of the Subsidiaries are unenforceable or invalid; and
the Company and the Subsidiaries are not aware of the granting of any
patent rights to third parties or the filing of any patent
applications by third parties or any other rights of third parties to
any Intellectual Property owned by the Company or the Subsidiaries.
(xviii)Neither the Company, nor any of its
Subsidiaries or affiliates, has taken or may take, directly or
indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common
Stock to facilitate the sale or resale of the Stock.
(xix)Neither the Company nor any Subsidiary is an
"investment company" or a company "controlled" by an "investment
company" within the meaning of such terms under the Investment Company
Act of 1940, as amended (herein called the Investment Company Act),
and the rules and regulations of the Commission thereunder.
(xx)The Company and each Subsidiary maintains a
system of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance
with management's general or specific authorization; (ii) transactions
are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles
and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xxi)The Company and each of the Subsidiaries carry,
or are covered by, insurance with insurers of nationally recognized
reputability in such amounts and covering such risks as is customary
for companies engaged in similar industries.
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<PAGE> 7
(xxii)The Company confirms as of the date hereof that
it is in compliance with all provisions of Section 1 of Laws of
Florida, Chapter 92-198, An Act Relating to Disclosure of Doing
Business with Cuba, and the Company further agrees that if it
commences engaging in business with the government of Cuba or with any
person or affiliate located in Cuba after the date the Registration
Statement becomes or has become effective with the Commission or with
the Florida Department of Banking and Finance (herein called the
Department), whichever date is later, or if the information reported
or incorporated by reference in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located
in Cuba changes in any material way, the Company will provide the
Department notice of such business or change, as appropriate, in a
form acceptable to the Department.
(xxiii)The Stock has been approved for listing on
the Nasdaq Stock Market.
(xxiv)The Registration Statement and the Prospectus
comply, and on the Closing Date and the Option Closing Date (as such
dates are hereinafter defined) the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the
Rules and Regulations; on the Effective Date the Registration
Statement did not, and on each of the Closing Date and the Option
Closing Date, will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and,
on the Effective Date the Prospectus did not and, on each of the
Closing Date and the Option Closing Date, will not contain any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that none of the representations and warranties in this
Section 2(a)(xxv) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing
to the Company by or on behalf of the Underwriters for use in the
Registration Statement or the Prospectus.
(b) Each of the Selling Shareholders (including the Principal
Selling Shareholder) hereby severally and not jointly represents and warrants
as follows:
(i)Such Selling Shareholder now has and at the
Closing Date and the Option Closing Date, as the case may be, will
have good and marketable title to the Stock to be sold by such Selling
Shareholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, including any liability for
estate inheritance taxes or any liability to or claim of any creditor,
devisee, legatee or beneficiary of such Selling Shareholder, with full
right, power and authority to effect the sale and delivery of such
Stock as herein contemplated, subject in the case of each Selling
Shareholder to the rights of the Custodian (as hereinafter defined),
pursuant to the Custody Agreement executed by such Selling
Shareholder; and upon the delivery of, against payment for, such Stock
pursuant to this Agreement, the Underwriters will acquire good and
marketable title thereto, free and clear of any lien, security
interest, encumbrance, claims or equitable interest, including any
liability for estate inheritance taxes, or any liability to or claim
of any creditor, devisee, legatee or beneficiary of such Selling
Shareholder, whatsoever.
(ii)Such Selling Shareholder has full right, power
and authority to execute and deliver this Agreement and the Custody
Agreement referred to below and to perform its obligations under such
agreements. The execution and delivery of this Agreement and the
Custody Agreement and Power of Attorney (the "Custody Agreement") has
been duly authorized, each such document constitutes a valid and
binding agreement of such Selling Shareholder and is enforceable
against
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<PAGE> 8
such Selling Shareholder in accordance with the terms of each such
document, and the consummation by such Selling Shareholder of the
transactions contemplated hereunder or thereunder and the fulfillment
by such Selling Shareholder of the terms of each such document will
not require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental
body (except as may be required under the Act and state securities
laws or blue sky laws) and will not result in a breach of any of the
terms and provisions of, or constitute a default under, the
organizational documents of such Selling Shareholder, if other than a
natural person, or any indenture, mortgage, deed of trust or other
agreement or instrument to which such Selling Shareholder is a party,
or of any order, rule or regulation applicable to such Selling
Shareholder of any court or of any regulatory body or administrative
agency or other governmental body. Such Selling Shareholder, if other
than a natural person, has been duly organized and is validly existing
and in good standing under the laws of the jurisdiction of its
organization as the type of entity that it purports to be.
(iii)Such Selling Shareholder has not taken, directly
or indirectly, any action designed to, or which has, or which might
reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Common Stock of the Company.
(iv)Such Selling Shareholder does not have, or has
waived prior to the date hereof, any preemptive right, co-sale right
or right of first refusal or other similar right to purchase any of
the Stock that are to be sold by the Company or any of the other
Selling Shareholders to the Underwriters pursuant to this Agreement;
such Selling Shareholder does not have, or has waived prior to the
date hereof, any registration right or other similar right to
participate in the offering made by the Prospectus, other than such
rights of participation as have been satisfied by the participation of
such Selling Shareholder in the transactions to which this Agreement
relates in accordance with the terms of this Agreement; and such
Selling Shareholder (who is specifically named in the Prospectus) does
not own any warrants, options or similar rights to acquire, and does
not have any right or arrangement to acquire, any capital stock,
rights, warrants, options or other securities from the Company, other
than those described in the Registration Statement and the Prospectus.
(c) Each of the Selling Shareholders (other than the Principal
Selling Shareholder) hereby severally represents and warrants that such Selling
Shareholder has reviewed the Registration Statement and Prospectus, and
although such Selling Shareholder has not independently verified the accuracy
or completeness of all the information contained therein, nothing has come to
the attention of such Selling Shareholder that would lead such Selling
Shareholder to believe that: (a) on the Effective Date the Registration
Statement contained and, on the Closing Date and the Option Closing Date,
contains any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading; and, (b) on the Effective Date the
Prospectus contained and, on the Closing Date and on the Option Closing Date,
contains any untrue statement of a material fact or omitted or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
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<PAGE> 9
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject
to the terms and conditions herein set forth, the Company agrees to issue and
sell 2,750,000 shares of Underwritten Stock to the several Underwriters, and
each Selling Shareholder agrees to sell to the several Underwriters the number
of shares of the Underwritten Stock set forth on Schedule II opposite the name
of such Selling Shareholder, and each of the Underwriters agrees to purchase
from the Company and each of the Selling Shareholders the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be sold by the
Company and the Selling Shareholders and purchased by the several Underwriters
shall be $___ per share. The obligations of each Underwriter to the Company
and each of the Selling Shareholders shall be to purchase from the Company and
the Selling Shareholders that number of shares of the Underwritten Stock which
represents the same proportion of the total number of shares of the
Underwritten Stock to be sold by each of the Company and the Selling
Shareholders pursuant to this Agreement as the number of shares of the
Underwritten Stock set forth opposite the name of such Underwriter in Schedule
I hereto represents of the total number of shares of the Underwritten Stock to
be purchased by all Underwriters pursuant to this Agreement, as adjusted by you
in such manner as you deem advisable to avoid fractional shares. In making
this Agreement, each Underwriter is contracting severally and not jointly;
except as provided in paragraphs (c) and (d) of this Section 3, the agreement
of each Underwriter is to purchase only the respective number of shares of the
Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail
or refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or any Selling Shareholder shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice to
purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter
or Underwriters and upon the terms herein set forth, all or any part of the
shares of the Stock which such defaulting Underwriter or Underwriters agreed to
purchase. If the non-defaulting Underwriters fail so to make such arrangements
with respect to all such shares and portion, the number of shares of the Stock
which each non-defaulting Underwriter is otherwise obligated to purchase under
this Agreement shall be automatically increased on a pro rata basis to absorb
the remaining shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the shares and portion which
the defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such shares of the Stock exceeds 10% of the total number of shares of
the Stock which all Underwriters agreed to purchase hereunder. If the total
number of shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase shall not be purchased or absorbed in accordance with the
two preceding sentences, the Company and the Selling Shareholders shall have
the right, within 24 hours next succeeding the 24-hour period above referred
to, to make arrangements with other underwriters or purchasers satisfactory to
you for purchase of such shares and portion on the terms herein set forth. In
any such case, either you or the Company and the Selling Shareholders shall
have the right to postpone the Closing Date determined as provided in Section 5
hereof for not more than seven business days after the date originally fixed as
the Closing Date pursuant to said Section 5 in order that any necessary changes
in the Registration Statement, the Prospectus or any other documents or
arrangements may be made. If neither the non-defaulting Underwriters nor the
Company and the Selling Shareholders shall make arrangements within the 24-hour
periods stated above for the purchase of all the shares of the Stock which the
defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company or the Selling Shareholders to any
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<PAGE> 10
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company or the Selling Shareholders. Nothing
in this paragraph (b), and no action taken hereunder, shall relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth,
each Selling Shareholder grants an option to the several Underwriters to
purchase, severally and not jointly, the number of shares of Option Stock set
forth on Schedule II opposite the name of such Selling Shareholder at the same
price per share as the Underwriters shall pay for the Underwritten Stock. Said
option may be exercised only to cover over-allotments in the sale of the
Underwritten Stock by the Underwriters and may be exercised in whole or in part
at any time (but not more than once) on or before the thirtieth day after the
date of this Agreement upon written or telegraphic notice by you to the Company
setting forth the aggregate number of shares of the Option Stock as to which
the several Underwriters are exercising the option. If the option granted
hereby is exercised in part, the number of shares of Option Stock to be sold by
each Selling Shareholder shall be determined on a pro rata basis based on the
maximum number of shares of Stock that could be sold by each Selling
Shareholder as set forth on Schedule II. Delivery of certificates for the
shares of Option Stock, and payment therefor, shall be made as provided in
Section 5 hereof. The number of shares of the Option Stock to be purchased by
each Underwriter shall be the same percentage of the total number of shares of
the Option Stock to be purchased by the several Underwriters as such
Underwriter is purchasing of the Underwritten Stock, as adjusted by you in such
manner as you deem advisable to avoid fractional shares.
(d) Certificates in negotiable form for the total number of shares
of Stock to be sold hereunder by the Selling Shareholders have been placed in
custody with the Company as custodian (the Custodian), pursuant to the Custody
Agreement executed by each Selling Shareholder for delivery of all Stock to be
sold hereunder by the Selling Shareholders. Each of the Selling Shareholders
specifically agrees that the Stock represented by the certificates held in
custody for the Selling Shareholders under the Custody Agreement are subject to
the interests of the Underwriters hereunder, that the arrangements made by the
Selling Shareholders for such custody are to that extent irrevocable, and that
the obligations of the Selling Shareholders hereunder shall not be terminable
by any act or deed of the Selling Shareholders (or by any other person, firm or
corporation including the Company, the Custodian or the Underwriters) or by
operation of law (including the death of an individual Selling Shareholder or
the dissolution of a corporate Selling Shareholder) or by the occurrence of any
other event or events, except as set forth in the Custody Agreement. If any
such event should occur prior to the delivery to the Underwriters of the Stock
hereunder, certificates for the Stock shall be delivered by the Custodian in
accordance with the terms and conditions of this Agreement as if such event has
not occurred. The Custodian is authorized to receive and acknowledge receipt
of the proceeds of sale of the Stock held by it against delivery of such Stock.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the public offering and increase or decrease the concessions and
discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front
cover page, the stabilization legend on the inside front cover and the first,
third and tenth paragraphs under "Underwriting" in the Registration Statement,
any Preliminary Prospectus and the Prospectus relating to the Stock filed by
the Company constitutes the only information furnished by the Underwriters to
the Company for inclusion in
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<PAGE> 11
the Registration Statement, any Preliminary Prospectus, and the Prospectus, and
you on behalf of the respective Underwriters represent and warrant to the
Company that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten
Stock and the Option Stock (if the option granted by Section 3(c) hereof shall
have been exercised not later than 10:00 a.m., New York time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Brobeck, Phleger & Harrison LLP, 1633 Broadway, New York, New
York, at 10:00 a.m., New York time, on the fourth business day after the date
of this Agreement, or at such time on such other day, not later than seven full
business days after such fourth business day, as shall be agreed upon in
writing by the Company and you. The date and hour of such delivery and payment
(which may be postponed as provided in Section 3(b) hereof) are herein called
the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be
exercised after 10:00 a.m., New York time, on the date two business days
preceding the Closing Date, delivery of certificates for the shares of Option
Stock, and payment therefor, shall be made at the office of Brobeck, Phleger &
Harrison LLP, 1633 Broadway, New York, New York, at 10:00 a.m., New York time,
on the third business day after the exercise of such option. The date and hour
of such delivery and payment (which may be postponed as provided in Section
3(b) hereof) are herein called the Option Closing Date.
(c) Payment for the Stock purchased from the Company shall be made
to the Company or its order by one or more certified or official bank check or
checks or by electronic wire transfer, in any event in same day funds. Payment
for the Stock purchased from the Selling Shareholders shall be made to the
Custodian, for the account of the Selling Shareholders by one or more certified
of official bank check or checks or by electronic wire transfer, in any event
in same day funds. Such payment shall be made upon delivery of certificates
for the Stock to you for the respective accounts of the several Underwriters
against receipt therefor signed by you. Certificates for the Stock to be
delivered to you shall be registered in such name or names and shall be in such
denominations as you may request at least one business day before the Closing
Date, in the case of Underwritten Stock, and at least one business day prior to
the purchase thereof, in the case of the Option Stock. Such certificates will
be made available to the Underwriters for inspection, checking and packaging at
the offices of Lewco Securities, 2 Broadway, New York, New York 10004 on the
business day prior to the Closing Date or, in the case of the Option Stock, by
3:00 p.m., New York time, on the business day preceding the Option Closing
Date.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Shareholders for shares to be purchased by any Underwriter
whose check or electronic wire transfer shall not have been received by you on
the Closing Date or the Option Closing Date, as the case may be. Any such
payment by you shall not relieve such Underwriter from any of its obligations
hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
(a) The Company covenants and agrees as follows:
(i)The Company will (i) prepare and timely file with
the Commission under Rule 424(b) a Prospectus containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A and (ii) not file any amendment to
the Registration Statement or supplement to the Prospectus of which
you shall not previously have been advised and
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<PAGE> 12
furnished with a copy or to which you shall have reasonably objected
in writing or which is not in compliance with the Securities Act or
the Rules and Regulations.
(ii)The Company will promptly notify you in the event
of (i) the request by the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, (ii) the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement, (iii) the
institution or notice of intended institution of any action or
proceeding for that purpose, (iv) the receipt by the Company of any
notification with respect to the suspension of the qualification of
the Stock for sale in any jurisdiction, or (v) the receipt by it of
notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time
be issued, to obtain the withdrawal thereof at the earliest possible
moment.
(iii)The Company will (i) on or before the Closing
Date, deliver to you a signed copy of the Registration Statement as
originally filed and of each amendment thereto filed prior to the time
the Registration Statement becomes effective and, promptly upon the
filing thereof, a signed copy of each post-effective amendment, if
any, to the Registration Statement (together with, in each case, all
exhibits thereto unless previously furnished to you) and will also
deliver to you, for distribution to the Underwriters, a sufficient
number of additional conformed copies of each of the foregoing (but
without exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to
the several Underwriters, at such office or offices as you may
designate, as many copies of the Prospectus as you may reasonably
request, and (iii) thereafter from time to time during the period in
which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many
additional copies of the Prospectus and as many copies of any
supplement to the Prospectus and of any amended prospectus, filed by
the Company with the Commission, as you may reasonably request for the
purposes contemplated by the Securities Act.
(iv)If at any time during the period in which a
prospectus is required by law to be delivered by an Underwriter or
dealer any event relating to or affecting the Company, or of which the
company shall be advised in writing by you, shall occur as a result of
which it is necessary, in the opinion of counsel for the Company or of
counsel for the Underwriters, to supplement or amend the Prospectus in
order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of
the Stock, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus of an amended prospectus so
that the Prospectus as so supplemented or amended will not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to
such purchaser, not misleading. If, after the public offering of the
Stock by the Underwriters and during such period, the Underwriters
shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the
Company in writing of the proposed variation, and, if in the opinion
either of counsel for the Company or of counsel for the Underwriters
such proposed variation requires that the Prospectus be supplemented
or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus
setting forth such variation. The Company authorizes the Underwriters
and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance
with the applicable provisions of the Securities Act and the
applicable rules and regulations thereunder for such period.
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<PAGE> 13
(v)Prior to the filing thereof with the Commission,
the Company will submit to you, for your information, a copy of any
post-effective amendment to the Registration Statement and any
supplement to the Prospectus or any amended prospectus proposed to be
filed.
(vi)The Company will cooperate, when and as requested
by you, in the qualification of the Stock for offer and sale under the
securities or blue sky laws of such jurisdictions as you may designate
and, during the period in which a prospectus is required by law to be
delivered by an Underwriter or dealer, in keeping such qualifications
in good standing under said securities or blue sky laws; provided,
however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation
in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports,
and other documents as are or may be required to continue such
qualifications in effect for so long a period as you may reasonably
request for distribution of the Stock.
(vii)During a period of five years commencing with
the date hereof, the Company will furnish to you, and to each
Underwriter who may so request in writing, copies of all periodic and
special reports furnished to shareholders of the Company and of all
information, documents and reports filed with the Commission.
(viii)The Company agrees to pay all costs and
expenses incident to the performance of the obligations of the Company
and the Selling Shareholders under this Agreement, including all costs
and expenses incident to (i) the preparation, printing and filing with
the Commission and the NASD of the Registration Statement, any
Preliminary Prospectus and the Prospectus, including listing fees
prescribed by the Nasdaq National Market, (ii) the furnishing to the
Underwriters of copies of any Preliminary Prospectus and of the
several documents required by paragraph (iii) of this Section 6(a) to
be so furnished, (iii) the printing of this Agreement and related
documents delivered to the Underwriters, (iv) the preparation,
printing and filing of all supplements and amendments to the
Prospectus referred to in paragraph (iv) of this Section 6(a), (v) the
furnishing to you and the Underwriters of the reports and information
referred to in paragraph (vii) of this Section 6(a) and (vi) the
printing and issuance of stock certificates, including the transfer
agent's fees. Notwithstanding anything to the contrary set forth
above, the Company shall not be obligated to pay any costs and
expenses incurred by or on behalf of the Selling Shareholders (other
than those costs and expenses enumerated above) without the Company's
prior consent.
(ix)The Company agrees to reimburse you, for the
account of the several Underwriters, for reasonable fees and related
disbursements (including counsel fees and disbursements and cost of
printing memoranda for the Underwriters) paid by or for the account of
the Underwriters or their counsel in qualifying the Stock under state
securities or blue sky laws and in the review of the offering by the
NASD.
(x)The Company hereby agrees that, without the prior
written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, the Company will not, for a period of 180 days following
the commencement of the public offering of the Stock by the
Underwriters (which shall be deemed to be the date of the Prospectus),
directly or indirectly, (i) sell, offer, contract to sell, transfer
the economic risk of ownership in, make any short sale, pledge, or
otherwise dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock. The foregoing sentence shall not
apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) shares of Common Stock issued by the Company upon the
exercise of options granted under the stock option plans of the
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<PAGE> 14
Company as described in the Registration Statement (herein called the
Option Plans) or upon the exercise of warrants or the conversion of
Preferred Stock described in the Registration Statement, and (C)
options to purchase Common Stock granted under the Option Plans.
(xi)If at any time during the 25-day period after the
Registration Statement becomes effective any rumor, publication or
event relating to or affecting the Company shall occur as a result of
which in your opinion the market price for the Stock has been or is
likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising
the Company to the effect set forth above, forthwith consult with you
concerning the advisability of, and if applicable the substance of, a
press release or other public statement, responding to or commenting
on such rumor, publication or event.
(xii)The Company is familiar with the Investment
Company Act and has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner to ensure that the
Company was not and will not be an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act and the rules and regulations thereunder.
(xiii)The Company will comply with the Securities Act
and the Rules and Regulations, and the Securities Exchange Act of 1934
(herein called the Exchange Act) and the rules and regulations of the
Commission thereunder, so as to permit the completion of the
distribution of the Stock as contemplated in this Agreement and the
Prospectus.
(xiv)The Company shall apply the net proceeds of its
sale of the Stock as set forth in the Prospectus under "Use of
Proceeds."
(xv)The Company will not take, directly or
indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Common Stock of the
Company.
(xvi)The Company agrees to use reasonable efforts to
cause all directors, officers, and shareholders to agree that, without
the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, such person or entity will not, for a period of 180 days
following the commencement of the public offering of the Stock by the
Underwriters (which shall be deemed to be the date of the Prospectus,
directly or indirectly, (i) sell, offer, contract to sell, make any
short sale, pledge, sell any option or contract to purchase, purchase
any option or shares of Common Stock or any securities convertible
into or exercisable for or any rights to purchase or acquire common
Stock or (ii) enter into any swap or other agreement that whether any
such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash
or otherwise.
(b) Each of the Selling Shareholders severally covenants and agrees as
follows:
(i)Each Selling Shareholder hereby agrees that,
without the prior written consent of Hambrecht & Quist LLC on behalf
of the Underwriters, such person or entity will not, for a period of
180 days following the commencement of the public offering of the
Stock by the Underwriters, directly or indirectly, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities
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<PAGE> 15
convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock or (ii) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to the Stock to be
sold to the Underwriters pursuant to this Agreement.
(ii)In order to document the Underwriters' compliance
with the reporting and withholding provisions of the Tax Equity and
Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax
Compliance Act of 1983 with respect to the transactions herein
contemplated, such Selling Shareholder shall deliver to you prior to
or at the Closing Date a properly completed and executed United States
Treasury Department Form W-9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof).
(iii)Such Selling Shareholder shall not take,
directly or indirectly, any action designed to cause or result in, or
that has constituted or might reasonably be expected to constitute,
the stabilization or manipulation of the price of any Common Stock of
the Company, and other than as permitted by the Securities Act, such
Selling Shareholder shall not distribute any prospectus or other
offering material in connection with the offering of the Shares.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) of this Section 7,
the Company and each Selling Shareholder agree, jointly and severally, to
indemnify and hold harmless each Underwriter and each person (including each
partner or officer thereof) who controls any Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Exchange Act, or
the common law or otherwise, and the Company and each Selling Shareholder,
jointly and severally, agree to reimburse each such Underwriter and controlling
person for any legal or other expenses (including, except as otherwise
hereinafter provided, reasonable fees and disbursements of counsel) incurred by
the respective indemnified parties in connection with defending against any
such losses, claims, damages or liabilities or in connection with any
investigation or inquiry of, or other proceeding which may be brought against,
the respective indemnified parties, in each case arising out of or based upon
(i) any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement), or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or the omission or alleged omission to state
therein a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that (1) the indemnity agreements of the Company and the
Selling Shareholders contained in this paragraph (a) shall not apply to any
such losses, claims, damages, liabilities or expenses if such statement or
omission was made in reliance upon and in conformity with information furnished
as herein stated or otherwise furnished in writing to the Company by or on
behalf of any Underwriter for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto and (2) the indemnity agreement contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the benefit
of any Underwriter from whom the person asserting any such losses, claims,
damages, liabilities or expenses purchased the Stock which is the subject
thereof (or to the benefit of any person controlling such
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<PAGE> 16
Underwriter) if at or prior to the written confirmation of the sale of such
Stock a copy of the Prospectus (or the Prospectus as amended or supplemented)
was not sent or delivered to such person and the untrue statement or omission
of a material fact contained in such Preliminary Prospectus was corrected in
the Prospectus (or the Prospectus as amended or supplemented) unless the
failure is the result of noncompliance by the Company with paragraph (iii) of
Section 6(a) hereof, and (3) each Selling Shareholder other than the Principal
Selling Shareholder shall only be liable under this paragraph with respect to
(A) information pertaining to such Selling Shareholder furnished by or on
behalf of such Selling Shareholder expressly for use in any Preliminary
Prospectus or the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto or (B) facts that would constitute a
breach of any representation or warranty of such Selling Shareholder set forth
in Sections 2(b) and 2(c) hereof.
The indemnity agreements of the Company and the Selling Shareholders
contained in this paragraph (a) and the representations and warranties of the
Company and the Selling Shareholders contained in Section 2 hereof shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any indemnified party and shall survive the delivery of and
payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its officers who signs the Registration Statement
on his own behalf or pursuant to a power of attorney, each of its directors,
each other Underwriter and each person (including each partner or officer
thereof) who controls the Company or any such other Underwriter within the
meaning of Section 15 of the Securities Act and the Selling Shareholders, from
and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act, or the common law or otherwise and
to reimburse each of them for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment thereof or supplement thereto) or
the omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of such
indemnifying Underwriter for use in the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto. The indemnity
agreement of each Underwriter contained in this paragraph (b) shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any indemnified party and shall survive the delivery of and
payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a)
and (b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought
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<PAGE> 17
hereunder. No indemnification provided for in such paragraphs shall be
available to any party who shall fail so to give the Notice if the party to
whom such Notice was not given was unaware of the action, suit, investigation,
inquiry or proceeding to which the Notice would have related and was prejudiced
by the failure to give the Notice, but the omission so to notify such
indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its
own expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any
indemnifying party shall be entitled, if it so elects within a reasonable time
after receipt of the Notice by giving written notice (herein called the Notice
of Defense) to the indemnified party, to assume (alone or in conjunction with
any other indemnifying party or parties) the entire defense of such action,
suit, investigation, inquiry or proceeding, in which event such defense shall
be conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
determined by such counsel to be necessary to protect the interests of the
indemnified party or parties and (ii) in any event, the indemnified party or
parties shall be entitled to have counsel chosen by such indemnified party or
parties participate in, but not conduct, the defense. If, within a reasonable
time after receipt of the Notice, an indemnifying party gives a Notice of
Defense and the counsel chosen by the indemnifying party or parties is
reasonably satisfactory to the indemnified party or parties, the indemnifying
party or parties will not be liable under paragraphs (a) through (c) of this
Section 7 for any legal or other expenses subsequently incurred by the
indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear
such other expenses as it or they have authorized to be incurred by the
indemnified party or parties. Notwithstanding anything to the contrary set
forth above, the indemnified party shall not, in connection with any action,
suit, investigation, inquiry or proceeding in the same jurisdiction, be liable
for the fees and expenses of more than one firm, acting as legal counsel, for
all indemnified parties. If, within a reasonable time after receipt of the
Notice, no Notice of Defense has been given, the indemnifying party or parties
shall be responsible for any legal or other expenses incurred by the
indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party
in connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Shareholders on the one hand, and the Underwriters on
the other, shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Stock received by the Company and
the Selling Shareholders and the total underwriting discount received by the
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<PAGE> 18
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by each indemnifying
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this
paragraph (d). The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities, or actions in respect thereof, referred
to in the first sentence of this paragraph (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigation, preparing to defend or defending against any
action or claim which is the subject of this paragraph (d). Notwithstanding
the provisions of this paragraph (d), no Underwriter shall be required to
contribute any amount in excess of the underwriting discount applicable to the
Stock purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this paragraph
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Shareholders will, without
the prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit
or proceeding in respect of which indemnification may be sought hereunder
(whether or not such Underwriter or any person who controls such Underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act is a party to such claim, action, suit or proceeding) unless such
settlement, compromise or consent includes an unconditional release of such
Underwriter and each such controlling person from all liability arising out of
such claim, action, suit or proceeding.
(f) The liability of each Selling Shareholder, including the
Principal Selling Shareholders, under such Selling Shareholder's
representations and warranties contained in paragraphs (a), (b) and (c) of
Section 2 hereof, as applicable, and under the indemnity and reimbursement
agreements contained in the provisions of this Section 7 and Section 11 hereof
shall be limited to an amount equal to the lesser of (i) the net proceeds
received by such Selling Shareholder from the sale of the Stock sold by such
Selling Shareholder to the Underwriters, or (ii) that portion of the total
amount of such losses, damages or liabilities which equals the percentage
obtained by dividing the total number of shares of Stock sold by such Selling
Shareholder by the total number of shares of Stock sold hereunder. The Company
and the Selling Shareholder may agree, as among themselves and without limiting
the rights of the Underwriters under this Agreement, as to the respective
amounts of such liability for which they each shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any
time prior to the Closing Date by giving written notice to the Company and the
Selling Shareholders if after the date of this Agreement trading in the Common
Stock shall have been suspended, or if there shall have occurred (i) the
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<PAGE> 19
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States
on or after the date hereof, (ii) any outbreak of hostilities or other national
or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, calamity, crisis or change in
economic or political conditions in the financial markets of the United States
would, in the Underwriters' reasonable judgment, make the offering or delivery
of the Stock impracticable, (iii) suspension of trading in securities generally
or a material adverse decline in value of securities generally on the New York
Stock Exchange, the American Stock Exchange, The Nasdaq Stock Market, or
limitations on prices (other than limitations on hours or numbers of days of
trading) for securities on either such exchange or system, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of, or commencement of any proceeding or
investigation by, any court, legislative body, agency or other governmental
authority which in the Underwriters' reasonable opinion materially and
adversely affects or will materially or adversely affect the business or
operations of the Company, (v) declaration of a banking moratorium by either
federal or New York State authorities or (vi) the taking of any action by any
federal, state or local government or agency in respect of its monetary or
fiscal affairs which in the Underwriters' reasonable opinion has a material
adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company or the Selling Shareholders to the Underwriters and no
liability of the Underwriters to the Company or the Selling Shareholders;
provided, however, that in the event of any such termination the Company and
the Selling Shareholders agree to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of
the Company and the Selling Shareholders under this Agreement, including all
costs and expenses referred to in paragraphs (viii) and (ix) of Section 6(a)
hereof (with the total obligation of each Selling Shareholder being limited to
its pro rata share of such costs and expenses based on the percentage that the
number of shares of Stock sold by such Selling Shareholder bears to the total
number of shares of Stock that could be sold pursuant to this Agreement.).
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters to purchase and pay for the Stock shall be subject to
the performance by the Company and by the Selling Shareholders of all their
respective obligations to be performed hereunder at or prior to the Closing
Date or Option Closing Date, as the case may be, and to the following further
conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock
hereunder and the validity and form of the certificates representing the Stock,
all corporate proceedings and other legal matters incident to the foregoing,
and the form of the Registration Statement and of the Prospectus (except as to
the financial statements contained therein), shall have been approved at or
prior to the Closing Date by Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters.
(c) You shall have received from Hale and Dorr LLP, counsel for
the Company, an opinion, addressed to the Underwriters and dated the Closing
Date, covering the matters set forth in Annex A hereto, and if Option Stock is
purchased at any date after the Closing Date, an additional opinion from such
counsel, addressed to the Underwriters and dated such later date, confirming
that the statements expressed as of the Closing Date in such opinions remain
valid as of such later date.
(d) You shall have received from Testa, Hurwitz & Thibeault, LLP
counsel for the Selling Shareholders an opinion, addressed to the Underwriters
and dated the Closing Date, covering the matters set
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<PAGE> 20
forth in Annex B hereto, and if Option Stock is purchased at any date after the
Closing Date, an additional opinion from such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements
expressed as of the Closing Date in such opinions remain valid as of such later
date.
(e) You shall have received from ______________________, Canadian
counsel to the Company, an opinion, addressed to the Underwriters and dated the
Closing Date, covering the matters set forth in Annex C hereto, and if Option
Stock is purchased at any date after the Closing Date, an additional opinion
from such counsel, addressed to the Underwriters and dated such later date,
confirming that the statements expressed as of the Closing Date in such
opinions remain valid as of such later date.
(f) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such
a supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and its Subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, and, since such
dates, except in the ordinary course of business, neither the Company nor any
of its Subsidiaries has entered into any material transaction not referred to
in the Registration Statement in the form in which it originally became
effective and the Prospectus contained therein, (iv) neither the Company nor
any of its Subsidiaries has any material contingent obligations which are not
disclosed in the Registration Statement and the Prospectus, (v) there are not
any pending or known threatened legal proceedings to which the Company or any
of its Subsidiaries is a party or of which property of the Company or any of
its Subsidiaries is the subject which are material and which are not disclosed
in the Registration Statement and the Prospectus, (vi) there are not any
franchises, contracts, leases or other documents which are required to be filed
as exhibits to the Registration Statement which have not been filed as
required, (vii) the representations and warranties of the Company and the
Selling Shareholders herein are true and correct in all material respects as of
the Closing Date or the Option Closing Date, as the case may be, and (viii)
there has not been any material change in the market for securities in general
or in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to make a
public offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(g) You shall have received on the Closing Date and the Option
Closing Date a certificate, dated the Closing Date or Option Closing Date, as
the case may be, and signed by the President and the Chief Financial Officer of
the Company, stating that the respective signers of said certificate have
carefully examined the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein and any
supplements or amendments thereto, and that the statements included in clauses
(i) through (vii) of paragraph (f) of this Section f are true and correct.
(h) You shall have received from Arthur Andersen LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and the
Option Closing Date, confirming that they are independent public accountants
with respect to the Company within the meaning of the Securities Act and the
Rules and Regulations and based upon the procedures described in their letter
delivered to you concurrently with the execution of this Agreement (herein
called the Original Letter), but carried out to a date not more than three
business days prior to the Closing Date or such later date on which Option
Stock is purchased (i)
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<PAGE> 21
confirming, to the extent true, that the statements and conclusions set forth
in the Original Letter are accurate as of the Closing Date or such later date,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company or its Subsidiaries which, in your sole
judgment, makes it impractical or inadvisable to proceed with the public
offering of the Stock or the purchase of the Option Stock as contemplated by
the Prospectus.
(i) You shall have received from Arthur Andersen LLP, a letter
stating that their review of the Company's system of internal accounting
controls, to the extent they deemed necessary in establishing the scope of
their examination of the Company's financial statements as at [__________,]
1997, did not disclose any weakness in internal controls that they considered
to be material weaknesses.
(j) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (vi) of Section 6(a) hereof.
(k) Prior to the Closing Date, the Stock to be issued and sold by
the Company and the Selling Shareholders shall have been duly authorized for
listing by the Nasdaq Stock Market.
(l) On or prior to the Closing Date, you shall have received from
all directors, officers, and shareholders listed on Exhibit A hereto
agreements, in form reasonably satisfactory to Hambrecht & Quist LLC, stating
that without the prior written consent of Hambrecht & Quist LLC on behalf of
the Underwriters, such person or entity will not, for a period of 180 days
following the commencement of the public offering of the Stock by the
Underwriters (which shall be deemed to be the date of the Prospectus, directly
or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in whole
or in part, any of the economic consequences or ownership of Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and the Selling Shareholders. Any such termination shall be without
liability of the Company or the Selling Shareholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Shareholders; provided, however, that (i) in the event of such termination, the
Company and the Selling Shareholders agree to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company or the Selling Shareholders under this Agreement,
including all costs and expenses referred to in paragraphs (viii) and (ix) of
Section 6(a) hereof (with the total obligation of each Selling Shareholder
being limited to its pro rata share of such costs and expenses based on the
percentage that the number of shares of Stock sold by such Selling Shareholder
bears to the total number of shares of Stock that could be sold pursuant to
this Agreement), and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company or the Selling
Shareholders to perform any agreement herein, to fulfill any of the
-21-
<PAGE> 22
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all reasonable out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SHAREHOLDERS. The obligation of the Company and the Selling Shareholders to
deliver the Stock shall be subject to the conditions that (a) the Registration
Statement shall have become effective and (b) no stop order suspending the
effectiveness thereof shall be in effect and no proceedings therefor shall be
pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall
not be fulfilled, this Agreement may be terminated by the Company and the
Selling Shareholders by giving notice to you. Any such termination shall be
without liability of the Company and the Selling Shareholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Shareholders; provided, however, that in the event of any such
termination the Company and the Selling Shareholders, jointly and severally,
agree to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company and the
Selling Shareholders under this Agreement, including all costs and expenses
referred to in paragraphs (viii) and (ix) of Section 6(a) hereof (with the
total obligation of each Selling Shareholder being limited to its pro rata
share of such costs and expenses based on the percentage that the number of
shares of Stock sold by such Selling Shareholder bears to the total number of
shares of Stock that could be sold pursuant to this Agreement).
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement, (and subject, in the case of the
Selling Shareholder, to the last sentence of this Section 11 and the provisions
of paragraph (f) of the Section 7), the Company and the Selling Shareholders
hereby, jointly and severally, agree to reimburse on a quarterly basis the
Underwriters for all reasonable legal and other expenses incurred in connection
with investigating or defending any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph (a) of Section 7 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 11 and the
possibility that such payments might later be held to be improper; provided,
however, that (i) to the extent any such payment is ultimately held to be
improper, the persons receiving such payments shall promptly refund them and
(ii) such persons shall provide to the Company, upon request, reasonable
assurances of their ability to effect any refund, when and if due. The
foregoing notwithstanding, each Selling Shareholder shall only be obligated
under this Section 11 if the statement or omission, or alleged statement or
omission, giving rise to the claim, action, investigation, inquiry or other
proceeding related to (a) information pertaining to such Selling Shareholder
furnished by or on behalf of such Selling Shareholder expressly for use in any
Preliminary Prospectus or the Registration Statement or the Prospectus or any
such amendment thereof or supplement thereto or (b) facts that would constitute
a breach of any representation or warranty of such Selling Shareholder
contained herein.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement
shall inure to the benefit of the Company, the Selling Shareholders and the
several Underwriters and, with respect to the provisions of Section 7 hereof,
the several parties (in addition to the Company, the Selling Shareholders and
the several Underwriters) indemnified under the provisions of said Section 7,
and their respective personal representatives, successors and assigns. Nothing
in this Agreement is intended or shall be construed to give to any other
person, firm or corporation any legal or equitable remedy or claim under or in
respect of this Agreement or any provision herein contained. The term
"successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.
-22-
<PAGE> 23
13. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Hambrecht & Quist
LLC, 230 Park Avenue, 21st Floor, New York, New York 10169, with a copy to
Brobeck, Phleger & Harrison LLP, 1633 Broadway, 47th Floor, New York, New York,
10019, Attention: Alexander D. Lynch, Esq.; and if to the Company, shall be
mailed, telegraphed or delivered to it at its office, 11413 Isaac Newton
Square, Reston, Virginia 20190, Attention: Chief Executive Officer, with a
copy to Hale and Dorr LLP, 1455 Pennsylvania Avenue, N.W., Washington, D.C.
20004, Attention: David Sylvester, Esq. and Brent B. Siler, Esq.; and if to
the Selling Shareholders, shall be mailed, telegraphed or delivered to the
Selling Shareholders in care of _________ at _____________ with a copy to
Testa, Hurwitz & Thibeault, LLP, Attention: William J. Schnoor, Esq. All
notices given by telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and
effect regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company or any Selling Shareholder, or their
respective directors or officers, and (c) delivery and payment for the Stock
under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
-23-
<PAGE> 24
This Agreement shall be governed by, and construed in accordance with, the laws
of the State of New York.
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
BEST SOFTWARE, INC.
By
--------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
PRINCIPAL SELLING SHAREHOLDERS:
----------------------------------------------
James F. Petersen, individually
SELLING SHAREHOLDERS LISTED ON SCHEDULE I
By:
-------------------------------------------
, Attorney-in-Fact
----------------------------
The foregoing Agreement is hereby
confirmed and accepted as of the date first
above written.
HAMBRECHT & QUIST LLC
WILLIAM BLAIR & COMPANY
By: Hambrecht & Quist LLC
By:
----------------------------------------
Managing Director
Acting on behalf of the several
Underwriters, including themselves,
named in Schedule I hereto.
-24-
<PAGE> 25
EXHIBIT A
LIST OF STOCKHOLDERS SUBJECT TO LOCK-UP
-25-
<PAGE> 26
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF
------------ SHARES
TO BE
PURCHASED
---------
<S> <C>
Hambrecht & Quist LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William Blair & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-------------------
-
===================
</TABLE>
-26-
<PAGE> 27
SCHEDULE II
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES OF UNDERWRITTEN STOCK NUMBER OF SHARES OF
TO BE SOLD OPTION STOCK TO BE SOLD
<S> <C> <C>
Total
=================== ===================
</TABLE>
-27-
<PAGE> 28
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF HALE AND DORR LLP
COUNSEL FOR THE COMPANY
(i) The Company is validly existing as a corporation in
good standing under the laws of the Commonwealth of Virginia, with
corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement. Each
of the Subsidiaries of the Company organized in the United States
(each, a "U.S. Subsidiary") is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation,
with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement. To
the best of such counsel's knowledge, the Subsidiaries are the only
subsidiaries (as defined in Rule 405 under the Securities Act), direct
or indirect, of the Company. The Company and each of the Subsidiaries
are duly qualified to transact business in the jurisdictions set forth
on Exhibit A hereto. The outstanding shares of capital stock of each
of the U.S. Subsidiaries have been duly authorized and validly issued
and are fully paid and non-assessable. The capital stock in such U.S.
Subsidiaries are owned by the Company or another U.S. Subsidiary, and
to the best knowledge of such counsel, are free and clear of all
liens, encumbrances and equities and claims; and to the best knowledge
of such counsel, no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert
any obligations into shares of capital stock or ownership interests in
the U.S. Subsidiaries are outstanding.
(ii) the authorized capital stock of the Company consists
of - shares of Preferred Stock, of which there are
outstanding - shares, and - shares Common Stock,
[$.01] par value, of which there are outstanding - shares of
(including the Underwritten Stock plus the number of shares of Option
Stock issued on the date hereof); all of the outstanding shares of
such capital stock (including the Underwritten Stock and the shares of
Option Stock issued, if any) have been duly authorized and validly
issued and are fully paid and nonassessable; any Option Stock
purchased after the Closing Date, when issued and delivered to and
paid for by the Underwriters as provided in the Underwriting
Agreement, will be duly authorized and validly issued and will be
fully paid and nonassessable; and no preemptive, co-sale or similar
rights of, or rights of refusal in favor of, shareholders exist with
respect to the Stock, or the issue and sale thereof, pursuant to the
Articles of Incorporation or Bylaws of the Company;
(iii) the Registration Statement has become effective under
the Securities Act and, to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration Statement
or suspending or preventing the use of the Prospectus is in effect and
no proceedings for that purpose have been instituted or are pending or
contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except
as to the financial statements and schedules and other financial and
statistical data contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects with
the requirements of the Securities Act and the Rules and Regulations;
(v) the information required to be set forth in the
Registration Statement in answer to Items 9 and 10 (insofar as it
relates to such counsel) of Form S-1 is to the best of such counsel's
knowledge accurately and adequately set forth therein in all material
respects or no response is required with respect to such Items.
-28-
<PAGE> 29
(vi) the Company has the corporate power and authority to
enter into the Underwriting Agreement and to issue, sell and deliver
to the Underwriters the Stock to be issued and sold thereunder; and
the Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
(vii) the issue and sale by the Company of the shares of
Stock sold by the Company as contemplated by the Underwriting
Agreement will not conflict with, or result in a breach of or default
under (A) the Certificate or Articles of Incorporation or Bylaws of
the Company or any of its U.S. Subsidiaries, (B) any applicable law or
regulation known to such counsel, or (C) so far as is known to such
counsel, any order, writ, injunction or decree, of any jurisdiction,
court or governmental instrumentality specifically naming the Company
or one of its U.S. Subsidiaries;
(viii) the information in the Prospectus under the captions
"Management - Employment Agreements," "Management - Stock Plans,"
"Management - Limitation of Liability and Indemnification," "Certain
Transactions," "Description of Capital Stock" and "Underwriting," to
the extent that such information constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary
in all material respects of such matters and conclusions; and the form
of certificate evidencing the Common Stock and filed as an exhibit to
the Registration Statement complies with Virginia law;
(ix) to such counsel's best knowledge, there are no
agreements, contracts, leases or documents to which the Company is a
party of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement which are not described or referred to
therein or filed as required.
(x) no consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation
of the transactions contemplated in the Underwriting Agreement, except
such as have been obtained under the Securities Act and such as may be
required under state securities or blue sky laws in connection with
the purchase and distribution of the Stock by the Underwriters;
(xi) to such counsel's best knowledge, there are no legal
or governmental proceedings pending or threatened against the Company
or any of the Subsidiaries of a character required to be disclosed in
the Registration Statement or the Prospectus, by the Securities Act or
the applicable Rules and Regulations other than those described
therein;
(xii) neither the Company nor any of the Subsidiaries is
presently (a) in violation of its respective Certificate or Articles
of Incorporation or Bylaws, or (b) to the best of such counsel's
knowledge, in material breach of, or in default under, any bond,
debenture, note or other evidence of indebtedness or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument listed as an exhibit to the
Registration Statement or any applicable statute, rule or regulation
known to such counsel or, to such counsel's best knowledge, any order,
writ or decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries, or over any
of their properties or operations; and
(xiii) to such counsel's best knowledge, except as set forth
in the Registration Statement and Prospectus, no holders of Common
Stock or other securities of the Company have registration rights with
respect to securities of the Company and, except as set forth in the
Registration Statement and Prospectus, all holders of securities of
the Company having rights to registration of
-29-
<PAGE> 30
such shares of Common Stock or other securities, because of the filing
of the Registration Statement by the Company have, with respect to the
offering contemplated thereby, waived such rights or such rights have
expired by reason of lapse of time following notification of the
Company's intent to file the Registration Statement or have included
securities in the Registration Statement pursuant to the exercise of
and in full satisfaction of such rights;
(xiv) to such counsel's best knowledge, the issuances and
sales by the Company of the securities described in Item 15 of the
Registration Statement were exempt from the registration requirements
of the Act, and, to such counsel's best knowledge, no event
(including, without limitation, the offering and sale of the Stock)
has occurred or is contemplated by the Company which has rendered or
will render such exemptions unavailable.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives
of the Company, the Representatives, Underwriters' counsel and the
independent certified public accountants of the Company, at which such
conferences the contents of the Registration Statement and Prospectus
and related matters were discussed, and although they have not
verified the accuracy or completeness of the statements contained in
the Registration Statement or the Prospectus, nothing has come to the
attention of such counsel which caused them to be believe that the
Registration Statement (other than the financial statements including
supporting schedules and financial and statistical data derived
therefrom, as to which such counsel need express no opinion), at the
Effective Date and at all times subsequent thereto up to and on the
Closing Date and on any later date on which Option Stock is to be
purchased, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the
prospectus (except as aforesaid) at the Closing Date or any later date
on which the Option Stock is to be purchased, as the case may be,
contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
-30-
<PAGE> 31
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF
TESTA, HURWITZ & THIBEAULT, LLP
COUNSEL TO THE SELLING SHAREHOLDERS
(i) each of the Selling Shareholders has full legal right, power
and authority, and any approval required by law (other than as required by
State securities and blue sky laws as to which such counsel need express no
opinion) to sell, assign, transfer and deliver the portion of the Stock to be
sold by such Selling Shareholder.
(ii) this Agreement and the Custody Agreement and Power of Attorney
have been duly authorized, executed and delivered each Selling Shareholder,
and, to the best knowledge of such counsel after due inquiry, the consummation
by such Selling Shareholder of the transactions contemplated hereunder or
thereunder and the fulfillment by such Selling Shareholder of the terms of each
such document will not require any consent, approval, authorization or other
order of any court, regulatory body, administrative agency or other
governmental body (except as may be required under the Act and state securities
laws or blue sky laws) and will not result in a breach of any of the terms and
provisions of, or constitute a default under, the organizational documents of
such Selling Shareholder, if other than a natural person, or any indenture,
mortgage, deed of trust or other agreement or instrument to which such Selling
Shareholder is a party, or of any order, rule or regulation applicable to such
Selling Shareholder of any court or of any regulatory body or administrative
agency or other governmental body. Such Selling Shareholder, if other than a
natural person, has been duly organized and is validly existing and in good
standing under the laws of the jurisdiction of its organization as the type of
entity that it purports to be.
(iii) Assuming that the Underwriters are bona fide purchasers
purchasing in good faith without notice of any adverse claim within the meaning
of the Uniform Commercial Code, by delivery of a certificate or certificates
evidencing the Stock to be sold by the Selling Shareholders, the Selling
Shareholders will transfer to the Underwriters who have purchased such Stock
pursuant to the Underwriting Agreement all rights the Selling Shareholders have
in such Stock, and the Underwriters will acquire such Stock free and clear of
any adverse claim (within the meaning of the Uniform Commercial Code).
-31-
<PAGE> 32
ANNEX C
MATTERS TO BE COVERED IN THE OPINION OF
CANADIAN COUNSEL TO THE COMPANY
(xv) The Subsidiary has been duly organized and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and authority
to own or lease its properties and conduct its business as described
in the Registration Statement. The Subsidiary is duly qualified to
transact business in all jurisdiction in which the conduct of its
business requires such qualification, except for those jurisdictions
in which the failure to qualify would not have a material adverse
effect upon the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of
the Company and the Subsidiary taken as a whole. The outstanding
shares of capital stock of the Subsidiary have been duly authorized
and validly issued and are fully paid and non-assessable. The capital
stock in such Subsidiary is owned by the Company or another Subsidiary
free and clear of all liens, encumbrances and equities and claims; and
no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in the Subsidiary are
outstanding;
(xvi) the authorized capital stock of the Subsidiary
consists of - shares of Preferred Stock, of which there are
outstanding - shares, and - shares Common Stock,
[$.01] par value, of which there are outstanding - shares;
all of the outstanding shares of such capital stock have been duly
authorized and validly issued and are fully paid and nonassessable;
and
(xvii) the Subsidiary is not (a) in violation of its
Certificate or Articles of Incorporation or Bylaws, or (b) to the best
of such counsel's knowledge, in material breach of, or in default
under, any bond, debenture, note or other evidence of indebtedness or
any lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which it
is a party or by which any of its property is bound that is material
to the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole or any applicable
statute, rule or regulation known to such counsel or, to such
counsel's best knowledge, any order, writ or decree of any court or
governmental agency or body having jurisdiction over the Subsidiary,
or over any of its properties or operations.
-32-
<PAGE> 1
EXHIBIT 4.1
[CERTIFICATE]
COMMON STOCK COMMON STOCK
NUMBER SHARES
THIS CERTIFICATE IS TRANSFERRABLE
IN BOSTON, MA AND NEW YORK, NY
BEST!
BEST SOFTWARE, INC.
Incorporated under the laws of the Commonwealth of Virginia.
CUSIP 086579 10 9
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT:
IS THE OWNER OF:
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, OF
BEST SOFTWARE, INC.
The shares represented by this certificate are transferrable only on the
stock transfer books of the corporation by the holder of record hereof in
person, or by his duly authorized attorney or legal representative, upon the
surrender of this certificate properly endorsed. This certificate and the
shares represented hereby are issued and shall be held subject to all of the
provisions contained in the corporation's official corporate papers filed with
the Virginia State Corporation Commission (copies of which are on file with the
Transfer Agent), to all of the provisions the holder, by acceptance hereof,
assents.
This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
In Witness Whereof, Best Software, Inc. has caused this certificate to
be executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
DATED:
/s/ TIMOTHY A. DAVENPORT /s/ SHELLEY W. REBACK
PRESIDENT SECRETARY
[SEAL]
Countersigned and Registered
BANKBOSTON, N.A.
Transfer Agent and Registrar
[SIG]
Authorized Signature
<PAGE> 2
BEST SOFTWARE, INC.
THE CORPORATION WILL FURNISH TO ANY SHAREHOLDER UPON REQUEST AND WITHOUT
CHARGE A FULL STATEMENT OF THE DESIGNATION, RELATIVE RIGHTS, PREFERENCES AND
LIMITATIONS OF THE SHARES OF EACH CLASS AND SERIES AUTHORIZED TO BE ISSUED SO
FAR AS THE SAME HAVE BEEN FIXED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO
DESIGNATE AND FIX THE RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF OTHER
SERIES. ANY SUCH REQUEST MAY BE MADE TO THE CORPORATION OR TO ITS TRANSFER
AGENT.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not as tenants
in common
UNIF TRAN MIN ACT -- ___________ Custodian _________________
(Cust) (Minor)
under the Uniform Transfers to Minors Act of
_________________________________________
(Name)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________________________ hereby sell,
(Name of Assignor)
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares of the common stock represented by the within Certificate and do hereby
irrevocably constitute and appoint______________________________________________
Attorney to transfer the said shares on the books of the within named
Corporation with full power of substitution in the premises.
Dated ________________________ X_____________________________________________
X_____________________________________________
SIGNATURE(S) GUARANTEED: NOTICE: The signature(s) to this assignment
must correspond with the name(s) as written
upon the face of the certificate in every
particular, without abbreviation or
______________________________ enlargement or any change whatever.
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS, AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION
PROGRAM) PURSUANT TO S.E.C. RULE
17Ad-15.
<PAGE> 1
EXHIBIT 5.1
HALE AND DORR
COUNSELLORS AT LAW
1455 PENNSYLVANIA AVE., N.W.
WASHINGTON D.C. 20004
202-942-8400
September 25, 1997
Best Software, Inc.
11413 Isaac Newton Square
Reston, Virginia 20190
Gentlemen:
This opinion is furnished to you in connection with a Registration Statement
on Form S-1 (Registration No. 333-33275), together with Amendment No. 1,
Amendment No. 2 and Amendment No. 3 thereto (the "Registration Statement"),
filed with the Securities and Exchange Commission (the "Commission") under the
Securities and Exchange Act of 1933, as amended, for the registration of
4,197,500 shares of Common Stock, no par value (the "Shares"), of Best Software,
Inc., a Virginia corporation (the "Company"), including the Shares to be sold
upon exercise of the underwriters' over-allotment option. The Shares are to be
sold by the Company and by certain selling Shareholders of the Company (the
"Selling Shareholders") pursuant to an Underwriting Agreement to be entered into
by and among the Company, the Selling Shareholders and Hambrecht & Quist LLC and
William Blair & Company, L.L.C. as representatives of the several underwriters
named in such Underwriting Agreement (the "Underwriting Agreement").
We have acted as counsel for the Company in connection with the issue and
sale by the Company of the Shares. We have examined signed copies of the
Registration Statement and all exhibits thereto, all as filed with the
Commission. We have also examined and relied upon the original or copies of
minutes of meetings of the shareholders and Board of Directors of the Company,
stock record books of the Company, a copy of the Amended and Restated Articles
of Incorporation of the Company and a copy of the Amended and Restated By-laws
of the Company.
<PAGE> 2
Best Software, Inc.
September 25, 1997
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified or photostatic copies, and the authenticity of the originals
of such latter documents.
We assume that the appropriate action will be taken, prior to the offer
and sale of the Shares, to register and qualify the Shares for sale under all
applicable state securities or "blue sky" laws.
Based upon the foregoing, we are of the opinion that the Shares have
been duly authorized and that, when the Shares to be sold by the Company are
issued sold by the Company pursuant thereto, the Shares will be validly issued,
fully paid and nonassessable.
We hereby consent to the filing of this opinion as part of the
Registration Statement and to the use of our name therein and in the related
Prospectus under the caption "Legal Matters".
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Very truly yours,
HALE AND DORR
<PAGE> 1
EXHIBIT 10.6A
AMENDMENT NO. 1 TO THE
LOAN AND WARRANT PURCHASE AGREEMENT
(THE "LENDER")
This Amendment No. 1 (the "Amendment"), to the Loan and Warrant
Purchase Agreement, dated March 2, 1993 (the "Purchase Agreement"), by and
between PNC Capital Corp (the "Lender") and Best Programs, Inc. (the
"Borrower") is dated as of September 24, 1997.
Capitalized terms not otherwise defined in this Agreement shall have
the respective meanings set forth in the Purchase Agreement.
WHEREAS, in order to reflect certain changed circumstances, and in
consideration of the terms and conditions contained in this Amendment and the
Purchase Agreement, the Lender and the Borrower, intending to be legally bound,
hereby agree as follows:
1. In the first paragraph of the preamble to the
Purchase Agreement, the name of the Borrower shall be
changed from Best Programs, Inc. to Best Software,
Inc.
2. Section 7.4 of the Purchase Agreement shall be
deleted in its entirety and replaced with the
following:
"Section 7.4. Board Representation. Until
the earlier of (i) such time as Lender is the holder
of less than two percent (2%) of the Common Stock, as
calculated on a fully diluted basis, including all
shares issuable upon conversion of Preferred Stock
and upon exercise of the Warrant and all other
warrants and granted options, or (ii) the closing of
a Qualifying Public Offering, Lender shall have the
right to designate one member of the Board of
Directors, which Board of Directors shall not exceed
eight (8) members in total. The member of the Board
of Directors designated by Lender shall be entitled
to receive Director's fees equal to those fees paid
to other non-management Directors, and shall be
entitled to reimbursement of all reasonable
out-of-pocket expenses incurred in connection with
attendance at such meeting. If Borrower reasonably
objects to any successor to succeed Peter Del Presto,
designated by Lender pursuant to this Section 7.4,
Lender shall designate another individual to serve on
Borrower's Board of Director."
<PAGE> 2
3. Section 10.9 shall be amended as follows:
The first line of the Borrower's address
shall be amended to read "Best Software,
Inc."
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the date first written above.
PNC CAPITAL CORP
By:
---------------------------------
Name:
Title:
BEST SOFTWARE, INC.
By:
---------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.7
AMENDED AND RESTATED WARRANT
THE SECURITIES REPRESENTED HEREBY AND THE SECURITIES WHICH MAY BE ACQUIRED UPON
THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED,
DONATED OR OTHERWISE TRANSFERRED (WHETHER OR NOT FOR CONSIDERATION) BY THE
HOLDER WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION
OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT SUCH
TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT.
THIS WARRANT AND THE STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT ARE SUBJECT
TO RESTRICTIONS ON TRANSFER SET FORTH IN THIS WARRANT AND IN A CERTAIN LOAN AND
WARRANT PURCHASE AGREEMENT BETWEEN THE ISSUER AND THE REGISTERED OWNER OF THIS
WARRANT (OR SUCH OWNER'S PREDECESSOR IN INTEREST), AND SUCH AGREEMENT IS
AVAILABLE FOR INSPECTION AT THE OFFICE OF THE SECRETARY OF THE ISSUER DURING
NORMAL BUSINESS HOURS.
Issued March 24, 1993
Amended and Restated in its entirety, September 24, 1997
Void after the later of (a) March 24, Right to Purchase up to 60,000 Shares
2003, or (b) the fourth anniversary of of Common Stock of Best Software, Inc.
the repayment in full of the Note (as (subject to conversion and adjustment
defined below) as provided herein), at the election
of the holder hereof
BEST SOFTWARE, INC. COMMON STOCK PURCHASE WARRANT
BEST SOFTWARE, INC., a Virginia corporation (the "Company"), for value
received and subject to the terms set forth below, hereby grants to PNC CAPITAL
CORP, a Delaware corporation, its registered successors and assigns (the
"Holder"), the right to purchase from the Company, at the purchase price of
$40.00 per share (as it may be adjusted from time to time as provided herein,
the "Exercise Price"), at any time or from time to time after the Issue Date
(as defined in Section 1 hereof) and prior to the later of (a) 3:00 p.m.,
Eastern time, on the fourth anniversary of the repayment in full of the Note
(as defined below), or (b) 3:00 p.m., Eastern time, on March 24, 2003, up to
1
<PAGE> 2
an aggregate of Sixty Thousand (60,000) fully paid and non-assessable shares of
Common Stock, no par value, of the Company (the "Common Stock"), the actual
number of such shares to be calculated as follows: This Warrant shall initially
be exercisable for Thirty-One Thousand Five Hundred (31,500) shares of Common
Stock. In the event the aggregate principal amount borrowed by the Company
under the Note (as defined below) from time to time reaches $5,000,000
(calculated without taking into consideration repayments or prepayments made by
the Company), this Warrant shall be exercisable (i) for an additional Thirteen
Thousand Five Hundred (13,500) shares of Common Stock and (ii) in the event (a)
the Note is not paid in full in accordance with its terms before March 24, 1995
or (b) the Company does not complete a Qualifying Public Offering (as defined
below) on or before March 24, 1995, this Warrant shall be exercisable for (x)
an additional Ten Thousand Five Hundred (10,500) shares of Common Stock if
$3,500,000 was borrowed by the Company under the Note or (y) an additional
Fifteen Thousand (15,000) shares of Common Stock if $5,000,000 was borrowed by
the Company under the Note (in each case, calculated as specified above). The
Exercise Price and the number and character of such shares of Common Stock
purchasable pursuant to the rights granted under this Warrant are subject to
adjustment as provided in Section 3, below.
This Warrant and the Non-Revolving Subordinated Promissory Note of the
Company in favor of Holder dated as of March 3, 1993 in the maximum principal
amount of $5,000,000 (the "Note") have been issued to Holder pursuant to the
Loan and Warrant Purchase Agreement dated as of March 2, 1993 (the "Loan
Agreement"), by and between the Company and Holder, in consideration of the
credit facilities provided to the Company by Holder as provided therein.
This Warrant is subject to the following provisions:
1. Definitions. Unless otherwise defined herein, all capitalized terms
not otherwise defined herein shall have the meanings ascribed thereto by the
Loan Agreement. As used herein, the following terms have the meanings ascribed
to them below:
(a) "Business Day" means any day other than a Saturday, Sunday or
legal holiday in the Commonwealth of Pennsylvania.
(b) "Capital Stock" shall have the meaning set forth in Section
3.1(a) hereof.
(c) "Cash Items" shall mean cash as the same is presented in the
Company's audited consolidated financial statements for its most recently
completed fiscal year.
2
<PAGE> 3
(d) "Common Stock" shall mean the common stock, no par value, of
the Company.
(e) "Equity Stock" means all stock of any class or classes
(however designated) of the Company, including, without limitation, the Common
Stock, no par value, of the Company, authorized upon the Issue Date or
thereafter, the holders of which shall have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating dividends after the payment of dividends and distributions on any
shares entitled to preference.
(f) "Issue Date" means the date of issuance of this Warrant as
specified on the first page hereof.
(g) "Person" means, without limitation, an individual, a
partnership, a corporation, a trust, a joint venture, an unincorporated
organization or a government or any department or agency thereof.
(h) "Permitted Issuance" shall mean (a) any issuance of Common
Stock upon a conversion of Preferred Stock issued and outstanding on March 24,
1993, provided such conversion is effected in accordance with the terms
governing such Preferred Stock on March 24, 1993; (b) any issuance of Common
Stock upon the exercise of employee options issued or to be issued by the
Company for the purchase of up to 175,000 shares of Common Stock in the
aggregate; or (c) any issuance of Common Stock upon an exercise of this Warrant
or the warrants originally issued pursuant to the Warrant Purchase Agreement
dated as of December 23, 1992 by and among the Company and the individuals and
entities listed on Exhibit A thereto.
(i) "Preferred Stock" means the redeemable, convertible, Class A
Preferred Stock, par value $0.01 per share, of the Company.
(j) "Public Offering" means a public offering pursuant to an
effective registration statement under the Act covering the offer and sale of
Common Stock for the account of the Company.
(k) "Purchaser" shall have the meaning set forth in Section
2.2(a)(i) hereof.
(l) "Qualifying Public Offering" means a Public Offering by the
Company in which the aggregate net proceeds received by the Company exceeds
$10,000,000 at a Public Offering price equal to or exceeding $50.00 per share
of Common Stock (as adjusted for any stock dividends, combinations or splits
with respect to such shares after the Issue Date).
3
<PAGE> 4
(m) "Warrant" means, collectively, this Warrant and all other
stock purchase warrants issued in exchange therefor or in replacement of this
Warrant.
2. Exercise of Warrant.
2.1. Exercise Period. The Holder may exercise this Warrant, in whole
or in part (but not as to a fractional share of Common Stock), at any time and
from time to time after the Issue Date and prior to the later of (a) 3:00 p.m.,
Eastern time, on the fourth anniversary of the repayment in full of the Note,
or (b) 3:00 p.m., Eastern time, on March 24, 2003 (the "Exercise Period").
During the Exercise Period, the Holder shall also have the right to convert
this Warrant in whole or in part, from time to time, at any time into shares of
Common Stock pursuant to Section 4 hereof.
2.2. Exercise Procedure.
(a) This Warrant will be deemed to have been exercised, in whole
or in part, at such time as the Company has received all of the following items
from the Holder of this Warrant (the "Exercise Date"):
(i) a completed Subscription Agreement as described in Section
2.4 hereof, executed by the Person exercising all or part of the
purchase rights represented by this Warrant (the "Purchaser");
(ii) this Warrant;
(iii) if this Warrant is not registered in the name of the
Purchaser, an Assignment or Assignments in the form set forth in
Exhibit B attached hereto (an "Assignment"), evidencing the assignment
of this Warrant to the Purchaser together with any documentation
required pursuant to Section 9(a) hereof; and
(iv) a check payable to the Company in an amount equal to the
product of the then current Exercise Price multiplied by the number of
shares of Common Stock being purchased upon such exercise; provided,
however, that in the event the Purchaser is the holder of the Note, in
lieu of delivering a check to the Company, the Purchaser may convert a
portion of the principal balance then outstanding under the Note equal
to the Exercise Price multiplied by the number of shares of Common
Stock to be acquired by the Purchaser under the Warrant. To exercise
such conversion right, the Purchaser shall surrender the Note at the
principal office of the Company, together with written instructions to
the Company as to the portion of the Note which the Purchaser elects to
4
<PAGE> 5
convert. The Company shall issue a replacement note of like tenor to
the Purchaser in an amount of the unconverted principal balance of the
Note, if any. Any such conversion of a portion of the Note to pay the
Exercise Price shall be subject to the confirmation by any holder of
Senior Indebtedness to the effect that the Company is not in default in
its obligations with respect to the Senior Indebtedness.
(b) As soon as practicable after the exercise of this Warrant in
full or in part, and in any event within fifteen (15) days after the Exercise
Date, the Company at its expense will cause to be issued in the name of and
delivered to the Holder hereof, or as the Holder (upon payment by the Holder of
any applicable transfer taxes) may direct (subject to the transfer restrictions
set forth herein), a certificate or certificates for the number of fully paid
and non-assessable shares of Common Stock to which the Holder shall be entitled
upon such exercise, together with any other stock or other securities and
property (including cash, where applicable) to which the Holder is entitled
upon exercise.
(c) Unless this Warrant has expired or all of the purchase
rights represented hereby have been exercised and/or converted pursuant to
Section 4, the Company at its expense will, within fifteen (15) days after the
Exercise Date, issue and deliver to or upon the order of the Holder hereof a
new warrant or warrants of like tenor, in the name of the Holder or as the
Holder (upon payment by the Holder of any applicable transfer taxes) may
request, calling in the aggregate on the face or faces thereof for the number
of shares of Common Stock remaining issuable under this Warrant.
(d) The Common Stock issuable upon the exercise of this Warrant
will be deemed to have been issued to the Purchaser on the Exercise Date, and
the Purchaser will be deemed for all purposes to have become the record
holder of such Common Stock on the Exercise Date.
(e) The issuance of certificates for shares of Common Stock upon
exercise of this Warrant will be made without charge to the Holder or the
Purchaser for any issuance tax in respect thereof or any other cost (other than
the Exercise Price) incurred by the Company in connection with such exercise
and the related issuance of shares of Common Stock.
2.3. Acknowledgment of Continuing Obligations. The Company will, at
the time of the exercise of this Warrant, upon the request of the Holder
hereof, acknowledge in writing its continuing obligation to afford to the
Holder any rights to which the Holder shall continue to be entitled after such
exercise in accordance with the provisions of this Warrant; provided, however,
that if the Holder shall fail to make any such request, such failure shall not
5
<PAGE> 6
affect the continuing obligation of the Company to afford to the Holder any
such rights.
2.4. Subscription Agreement. The Subscription Agreement shall be
substantially in the form set forth in Exhibit A attached hereto (a
"Subscription Agreement"), except that if the shares of Common Stock issuable
upon exercise of this Warrant are not to be issued in the name of the Holder
hereof, the Subscription Agreement will also state the name of the Person to
whom the certificates for the shares of Common Stock are to be issued (subject
to the transfer restrictions set forth herein), and if the number of shares of
Common Stock to be issued does not include all the shares of Common Stock
issuable hereunder, it will also state the name of the Person to whom a new
Warrant for the unexercised portion of the rights hereunder is to be delivered.
2.5. Fractional Shares. If a fractional share of Common Stock would,
but for the provisions of Section 2.1 hereof, be issuable upon exercise of the
rights represented by this Warrant, the Company will, within fifteen (15) days
after the Exercise Date, deliver to the Purchaser a check payable to the
Purchaser in lieu of such fractional share, in an amount equal to the Fair
Market Value (as defined by Section 5.4 hereof) of such fractional share as of
the close of business on the Exercise Date.
3. Antidilution Provisions.
3.1. Adjustment of Number of Shares Purchasable and Exercise Price.
Subject to the provisions of this Section 3, the Exercise Price and the number
of shares of Common Stock issuable upon exercise of this Warrant shall be
subject to adjustment from time to time.
(a) Issuance of Additional Shares of Common Stock, In the event
the Company shall issue or sell (or in accordance with Subsection 3.2 below is
deemed to have issued or sold) any shares of its Common Stock, or stock having
a preference or sharing on an equal basis as to dividends or distributions in
liquidation with the Common Stock, pursuant to any stock split, dividend or
recapitalization of the Company ("Capital Stock"), or shall issue or sell (or
in accordance with Subsection 3.2 below be deemed to have issued or sold)
shares of Capital Stock at a price per share less than the greater of (i)
$40.00 (as adjusted for any stock dividends, combinations or splits) and (ii)
in the case of any such issuance or sale following a Qualifying Public
Offering, the Fair Market Value thereof, as defined by Section 5.4 hereof (the
"Reference Price"), the then prevailing Exercise Price shall be reduced by
multiplying the then prevailing Exercise Price by the factor obtained by
dividing (A) an amount equal to the sum of (1) the number of shares of Capital
Stock outstanding (or deemed outstanding pursuant to the provisions of
Subsection 3.2) immediately prior to such issuance or
6
<PAGE> 7
sale multiplied by the then prevailing Exercise Price plus (2) the aggregate
consideration, if any, received or to be received by the Company upon such
issuance or sale, by (B) the total number of shares of Capital Stock
outstanding immediately after such issuance or sale (or deemed issuance
pursuant to the provisions of Subsection 3.2) multiplied by the then prevailing
Exercise Price.
(b) Adjustment of Number of Shares Purchasable. Upon any
adjustment of the Exercise Price as provided in this Section 3.1, the Holder
shall thereafter be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of shares of Common Stock (calculated to the
nearest 1/100th of a share) obtained by multiplying the Exercise Price by the
number of shares of Common Stock purchasable hereunder immediately prior to
such adjustment and dividing the product thereof by the Exercise Price
resulting from such adjustment.
3.2. Provisions Applicable To Section 3.1. For purposes of Section 3.1
hereof, the following provisions shall be applicable:
(a) Minimum Adjustment. In the event any adjustment of the Exercise
Price pursuant to Section 3.1 hereof shall result in an adjustment of less than
$0.01 per share of Common Stock, no such adjustment shall be made, but any such
lesser adjustment shall be carried forward and shall be made at the time and
together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to $0.01 or more per share of
Common Stock.
(b) Reorganization, Reclassification or Recapitalization of
Company. In the event of any capital reorganization, reclassification or
recapitalization of the capital stock of the Company (other than a change in
par value, or from par value to no par value or from no par value to par
value), there shall thereafter be deliverable upon the exercise of this Warrant
or any portion thereof (in lieu of or in addition to the number of shares of
Common Stock theretofore deliverable) the number of shares of stock or other
securities or property to which the holder of the number of shares of Common
Stock which would otherwise have been deliverable upon the exercise of this
Warrant or any portion thereof at the time would have been entitled upon such
capital reorganization, reclassification or recapitalization of capital stock,
and at the Exercise Price as adjusted pursuant to the provisions of Section
3.1(a) hereof. Prior to and as a condition of the consummation of any
transaction described in the preceding sentence, the Company shall make
appropriate, written adjustments in the application of the provisions herein
set forth satisfactory to the Holders of this Warrant so that the provisions
set forth herein shall thereafter be applicable, as nearly as possible, in
relation to any shares of stock or other securities or other property
thereafter deliverable upon exercise of this
7
<PAGE> 8
Warrant. Any such adjustment shall be made by and set forth in a supplemental
agreement between the Company and the successor entity and be approved by the
Holder of this Warrant.
(c) Issuance of Warrants, Rights or Options. If the Company in any
manner grants any warrants, rights or options to subscribe for or to purchase
Common Stock or any stock or securities convertible into or exchangeable for
Common Stock, other than pursuant to a Permitted Issuance (such rights or
options being herein called "Options" and such convertible or exchangeable
stock or securities being herein called "Convertible Securities") or in any
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities is less than the
Reference Price, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange of
the total maximum amount of such Convertible Securities issued will be deemed
to be outstanding and to have been issued and sold by the Company for such
price per share. For purposes of this paragraph, the "price per share for which
Common Stock is issuable upon exercise of such Options or upon conversion or
exchange of such Convertible Securities" will be determined by dividing (A) the
total amount, if any, received or receivable by the Company as consideration
for the granting of such Options or the issuance or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration
payable to the Company upon exercise of all such Options, plus, in the case of
Convertible Securities or Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable to the
Company upon issuance or sale of such Convertible Securities and the conversion
or exchange thereof, by (B) the total maximum number of shares of Common Stock
issuable upon the exercises of such Options or upon the conversion or exchange
of all Convertible Securities issued or issuable upon the exercise of such
Options. No additional adjustment of the Exercise Price will be made when
Convertible Securities are actually issued upon the exercise of such Options or
when Common Stock is actually issued upon the exercise of such Options or upon
the conversion or exchange of such Convertible Securities.
(d) Change in Option Price or Conversion Rate. If the purchase
price provided for in any Options, the additional consideration, if any,
payable upon the conversion or exchange of any Convertible Securities, or the
rate at which any Convertible Securities are convertible into or exchangeable
for Common Stock change at any time (other than under or by reason or
provisions designed to protect against dilution of the type set forth in this
Section 3 and which have no more favorable effect on the holders of such
Options or Convertible Securities than this Section 3 would have if this
Section 3 were included in such Options or Convertible Securities), the
Exercise Price in effect at the time of such change will be readjusted to the
Exercise Price which would have
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<PAGE> 9
been in effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration
or changed conversion rate, as the case may be, at the time initially granted,
issued or sold. If the purchase price provided for in any Option, the
additional consideration, if any, payable upon the conversion or exchange of
any Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock, is reduced at any time under
or by reason of provisions with respect thereto designed to protect against
dilution of the type set forth herein and which have no more favorable effect
on the holders of such Options or Convertible Securities than the provisions
hereof would have if the provisions of this Warrant were included in such
Options or Convertible Securities, then in the case of the delivery of Common
Stock upon the exercise of any such Option or upon the conversion or exchange
of any such Convertible Security, the Exercise Price then in effect under this
Warrant will forthwith be adjusted to such respective amount as would have been
obtained had such Option or Convertible Security never been made in accordance
with paragraph (c) above upon the issuance of the shares of Common Stock
delivered upon such exercise or conversion.
(e) Treatment of Expired Options and Unexercised Convertible
Securities. Upon the expiration of any Option or the termination of any right
to convert or exchange any Convertible Securities without the exercise of such
Option or right, the Exercise Price then in effect hereunder will be adjusted
to the Exercise Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities never been
issued.
(f) Calculation of Consideration Received. In case any Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for consideration part or all of which is cash, the amount of
cash consideration received therefor will be deemed to be the net amount
received by the Company therefor. In case any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for a consideration part or all of which is other than cash, the amount of the
consideration other than cash received by the Company will be the fair value of
such consideration, except where such consideration consists of securities, in
which case the amount of consideration received by the Company will be the
Fair Market Value thereof (as defined in Section 5.4 hereof) as of the date of
receipt. In case any Common Stock, Options or Convertible Securities are issued
in connection with any merger in which the Company is the surviving
corporation, the amount of consideration therefor will be deemed to be the fair
value of such portion of the net assets and business of the non-surviving
corporation as is attributable to such Common Stock, Options or Convertible
Securities, as the case may be.
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<PAGE> 10
(g) Integrated Transactions. In case any Option is issued in connection
with the issuance or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Option by the parties thereto, the Option will be deemed to
have been issued without consideration.
3.3. Certificates.
(a) Upon any adjustment of the Exercise Price pursuant to
Section 3.1 hereof, a certificate signed by the Treasurer or Chief Financial
Officer of the Company, setting forth in reasonable detail the events requiring
the adjustment and the method by which such adjustment was calculated, shall be
mailed (by first class mail, postage prepaid or by recognized overnight
delivery service) to the Holder of this Warrant specifying the adjusted
Exercise Price and the number of shares of Common Stock purchasable upon
exercise of this Warrant after giving effect to the adjustment of such number
pursuant to Section 3.1 hereof. In the event the Holder disputes the matters
set forth in such certificate, the Holder shall have the right to request a
calculation by an independent firm of certified public accountants of
recognized national standing, to be selected by the Company and the Holder. The
certified public accounting firm shall deliver to the Holder a certificate
setting forth its calculation of the matters set forth in the Company's
certificate, which certificate shall be conclusive evidence of the accuracy or
inaccuracy of any computation made by the Company under Section 3.1 hereof. The
Holder shall bear the expense of any such calculation performed; provided,
however, that in the event that the adjusted Exercise Price calculated by the
accounting firm varies from the adjusted Exercise Price calculated by the
Company by 10% or more, the Company shall bear the expense thereof.
(b) Failure to file any certificate or notice or to mail any
notice, or any defect in any certificate or notice, pursuant to this Section
3.3, shall not affect the legality or validity of the adjustment of the
Exercise Price, the number of shares purchasable upon exercise of this Warrant,
or any transaction giving rise thereto.
3.4. No Impairment. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, recapitalization,
reclassification, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all action as may be
necessary or appropriate in order to protect the rights of the Holder of this
Warrant against impairment.
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<PAGE> 11
4. Right to Convert Warrant.
4.1. Right to Convert. The Holder shall have the right to require the
Company to convert this Warrant (the "Conversion Right") in whole or in part,
from time to time, at any time, into shares of Common Stock, at the election of
the Holder, as provided in this Section 4. Upon exercise of the Conversion
Right, the Company shall deliver to the Holder (without payment by the Holder
of any Exercise Price) that number of shares of Common Stock equal to the
number of shares to be converted times the quotient obtained by dividing (a)
the value of this Warrant at the time the Conversion Right is exercised
(determined by subtracting the Exercise Price in effect immediately prior to
the exercise of the Conversion Right from the Fair Market Value of one share of
Common Stock issuable upon exercise of this Warrant immediately prior to the
exercise of the Conversion Right) by (b) the Fair Market Value of one share of
Common Stock immediately prior to the exercise of the Conversion Right;
provided, however, that there shall be no Conversion Right at any time when the
Exercise Price is greater than the Fair Market Value of one share of Common
Stock.
4.2 Method of Exercise.
(a) The Conversion Right may be exercised by the Holder by
the surrender of this Warrant at the principal office of the Company together
with a written statement specifying the portion of this Warrant to be so
converted.
(b) As soon as practicable after the conversion of this Warrant
in full or in part, and in any event within fifteen (15) days after the receipt
by the Company of the Warrant together with the aforesaid written statement
(the "Conversion Date"), the Company at its expense will cause to be issued in
the name of and delivered to the Holder hereof, or as the Holder (upon payment
by the Holder of any applicable transfer taxes) may direct (subject to the
transfer restrictions set forth herein), a certificate or certificates for the
number of fully paid and non-assessable shares of Common Stock to which the
Holder shall be entitled upon such conversion.
(c) Unless this Warrant has expired or been exercised and/or
converted in whole, the Company at its expense will, within fifteen (15) days
after the Conversion Date, issue and deliver to or upon the order of the Holder
hereof a new warrant or warrants of like tenor, in the name of the Holder or as
the Holder (upon payment by the Holder of any applicable transfer taxes) may
request, calling in the aggregate on the face or faces thereof for the number
of shares of Common Stock remaining issuable under this Warrant.
(d) The Common Stock issuable upon the conversion of this
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<PAGE> 12
Warrant will be deemed to have been issued to the Purchaser on the Conversion
Date, and the Purchaser will be deemed for all purposes to have become the
record holder of such Common Stock on the Conversion Date.
(e) The issuance of certificates for shares of Common Stock upon
conversion of this Warrant will be made without charge to the Holder for any
issuance tax in respect thereof or any other cost incurred by the Company in
connection with such conversion and the related issuance of shares of Common
Stock.
4.3. Determination of Fair Market Value. For purposes of this Section
4, the term "Fair Market Value" of a share of Common Stock as of a specific
date (the "Determination Date") shall mean the following:
(a) if shares of Common Stock are listed on any national
securities exchange or quoted on the Nasdaq Stock Market ("NASDAQ"),
National Market ("NMS"), the daily closing price on the Business Day
preceding the Determination Date (the "Closing Price");
(b) if shares of Common Stock are not listed on any national
securities exchange or quoted on NASDAQ/NMS but otherwise are quoted on
NASDAQ, the average of the high and low bids as reported by NASDAQ for
the Business Day preceding the Determination Date; or
(c) if shares of Common Stock are not listed on a national
securities exchange or quoted on NASDAQ/NMS or otherwise on NASDAQ,
the Fair Market Value per share of Common Stock shall be the amount
agreed upon by the Company and the Holder or, if they cannot so agree,
the amount determined in accordance with the Appraisal Procedure set
forth in Section 5.4(c); or
(d) if the Holder elects to convert this Warrant in
connection with the completion of a Public Offering of the Company, the
net price per share to the public in such Public Offering.
5. Right to Require Purchase of Warrant and Common Stock.
5.1. Right to Require Purchase. The Holder shall have the right to
require the Company to purchase all or a portion (but not less than half) of
the shares of Common Stock (a) issuable upon exercise of the Warrant or (b)
actually issued pursuant to the Warrant and owned by the Holder (the "Put
Right") at any time after March 24, 1998 or, except with respect to a merger of
the Company with a subsidiary or a merger where the Company is the surviving
corporation (in each case where the stockholders of the Company immediately
prior to any such
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<PAGE> 13
merger continue to own 90% of the equity securities of the surviving
corporation immediately after such merger), upon the merger or consolidation of
the Company with, or the sale of all or a substantial portion of the assets or
capital stock of the Company to, any Person. Upon exercise of the Put Right,
the Company shall deliver to the Holder immediately available funds equal to
the Put Value (the "Put Proceeds"). For purposes of this Section 5, the term
"Put Value" shall mean an amount equal to the Fair Market Value of a share of
Common Stock as of the Determination Date (as defined below), multiplied by the
maximum number of shares of Common Stock potentially issuable upon exercise of
the Warrant or actually issued pursuant to the Warrant and owned by the Holder
which the Holder is requiring the Company to purchase. In the case of an
exercise of the Put Right as to shares not yet issued but issuable upon
exercise of this Warrant, there shall be subtracted therefrom an amount equal
to the product of the Exercise Price and the number of shares not yet issued
but issuable upon exercise of this Warrant as to which the Put Right is being
exercised.
5.2. Termination of Put Right. The Put Right shall terminate upon the
consummation of a Qualifying Public Offering by the Company.
5.3. Method of Exercise. The Put Right may be exercised by the Holder
by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the Holder thereby intends to
exercise the Put Right. The Put Proceeds shall be delivered to the Holder on
the day the Company receives this Warrant together with such written statement.
5.4. Determination of Fair Market Value. For purposes of this Section
5, the term "Fair Market Value" of a share of Common Stock as of the
Determination Date shall mean the Closing Price if shares of Common Stock are
listed on any national securities exchange or quoted on NASDAQ/NMS. In the
event that shares of Common Stock are not listed on any national securities
exchange or quoted on NASDAQ/NMS, the term "Fair Market Value" of a share of
Common Stock as of the Determination Date shall mean the greater of the
following:
(a) if shares of Common Stock are not listed on any national
securities exchange or quoted on NASDAQ/NMS but otherwise are quoted on
NASDAQ, the average of the high and low bids are reported by NASDAQ for
the Business Date preceding the Determination Date;
(b) the price per share of Common Stock received by the
stockholders of the Company in a merger, consolidation or sale of
Common Stock to a Person other than the stockholders of the Company on
March 24, 1993 involving greater than eighty percent (80%) of the
outstanding shares of Common Stock, or the price per share of Common
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<PAGE> 14
Stock received by the Company upon the sale of all or substantially all
of the assets of the Company to a Person other than the stockholders of
the Company on March 24, 1993; or
(c) The Fair Market Value as determined in accordance with the
following appraisal procedure (the "Appraisal Procedure"). The Company
and the Holder each shall engage (at their own expense) an independent,
professional appraiser to determine the Fair Market Value of a share of
Common Stock as of the Determination Date. In the event the two
appraisals are equal to or less than ten percent (10%) apart in value,
the two appraisals shall be averaged to obtain the Fair Market Value.
In the event the two appraisals are greater than ten percent (10%)
apart in value, the Company and the Holder shall select a third
independent, professional appraiser acceptable to both parties to
determine the Fair Market Value of a share of Common Stock as of the
Determination Date. In the event a third appraiser is selected, the
Fair Market Value shall be equal to the value of a share of Common
Stock as determined by such third appraiser. The costs of the third
appraiser shall be borne by the Company.
6. Notices of Record Date, Etc. In the event of:
(a) any taking by the Company of a record of the holders of
any class of securities of the Company for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution, or any right to subscribe for, purchase, or otherwise
acquire any shares of stock of any class of the Company or any other
securities or property, or to receive any other right; or
(b) except with respect to a merger of the Company with a
subsidiary or a merger where the Company is the surviving corporation
(in each case where the stockholders of the Company immediately prior
to any such merger are the stockholders of the surviving corporation
immediately after such merger), any capital reorganization of the
Company, any reclassification or recapitalization of the capital stock
of the Company or any transfer of all or substantially all of the
assets of the Company to or merger or consolidation of the Company with
or into any other Person; or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company; or
(d) any proposed issue or grant by the Company of any shares
of stock of any class or any other securities of the Company, or any
right
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<PAGE> 15
or option to subscribe for, purchase or otherwise acquire any shares of
stock of any class or any other securities of the Company (other than
(i) the issue of Common Stock upon the exercise of this Warrant or any
other Warrant (as defined by the Purchase Agreement), or the conversion
of the Preferred Stock, and (ii) stock options to purchase shares of
Common Stock which may be granted to employees, directors or
consultants of the Company or the issuance of such shares pursuant to
the exercise of such options, (iii) any shares issued in transactions
to which Section 3.2(b) applies, and (iv) a stock split in connection
with a Qualifying Public Offering);
then and in each such event the Company will mail or cause to be mailed to the
Holder of this Warrant a notice specifying (A) the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and stating the amount and character of such dividend, distribution or right,
(B) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock shall be entitled to exchange their
shares of Common Stock for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up, and (C) the amount and
character of any stock of any class or other securities of the Company, or
rights or options with respect thereto, proposed to be issued or granted, the
date of such proposed issue or grant and the Persons or class of Persons to
whom such proposed issue or grant is to be offered or made. Such notice shall
be mailed at least twenty (20) days prior to the date therein specified.
7. Reservation of Stock, Etc., Issuable on Exercise of Warrant. The
Company will at all times reserve and keep available solely for issuance and
delivery upon the exercise of this Warrant, all shares of Common Stock from
time to time issuable upon the exercise of this Warrant.
8. Purchase Rights. If at any time the Company grants, issues or
sells any rights or options to subscribe for or to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
capital stock of the Company (the "Purchase Rights"), then the Holder of this
Warrant will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock
acquirable upon exercise of this Warrant had such Warrants been fully
exercised immediately prior to the date on which a record was taken for the
grant, issuance or sale of such Purchase Rights (whether or not such Warrants
have been issued).
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<PAGE> 16
9. Disposition of This Warrant, Common Stock, Etc.
(a) The Warrants and the Common Stock issued in respect of the
Warrants shall not be sold or transferred (i) unless either (A) they first
shall have been registered under the Securities Act or (B) the Company first
shall have been furnished with an opinion of legal counsel, reasonably
satisfactory to the Company, to the effect that such sale or transfer is exempt
from the registration requirements of the Securities Act, and (ii) for so long
as the Company's Common Stock is not registered under Section 5 of the Act and
unless otherwise agreed by the Company, to any transferee which is a potential
or actual customer, supplier or competitor of the Company. It shall be a
condition to the transfer of this Warrant that any transferee thereof deliver
to the Company its written agreement to accept and be bound by the terms and
conditions of this Warrant.
(b) The stock certificates of the Company that will evidence
the shares of Common Stock with respect to which this Warrant may be
exercisable will be imprinted with conspicuous legends in substantially the
following forms:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY
NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED (WHETHER
OR NOT FOR CONSIDERATION) BY THE HOLDER WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY, IN EACH SUCH CASE, TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE
IN VIOLATION OF THE ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS
ON TRANSFER SET FORTH IN A CERTAIN LOAN AND WARRANT PURCHASE AGREEMENT BETWEEN
THE ISSUER AND THE REGISTERED OWNER OF THIS WARRANT (OR SUCH OWNER'S
PREDECESSOR IN INTEREST), AND SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE
OFFICE OF THE SECRETARY OF THE ISSUER DURING NORMAL BUSINESS HOURS."
10. Rights and Obligations of Warrant Holder. The Holder of this
Warrant shall not, by virtue hereof, be entitled to any voting rights or other
rights as a stockholder of the Company. No provision of this Warrant, in the
absence of affirmative actions by the Holder to purchase Common Stock of the
Company by exercising this Warrant and no enumeration in this Warrant of the
rights or privileges of the Holder, will give rise to any liability of such
Holder for the Exercise Price of Common Stock acquirable by exercise hereof or
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<PAGE> 17
as a stockholder of the Company.
11. Transfer of Warrants. Subject to compliance with the restrictions
on transfer applicable to this Warrant referred to in Section 9 hereof, this
Warrant and all rights hereunder are transferable, in whole or in part, without
charge to the registered Holder, upon surrender of this Warrant with a properly
executed Assignment to the Company, and the Company at its expense will issue
and deliver to or upon the order of the Holder hereof a new Warrant or Warrants
in such denomination or denominations as may be requested but otherwise of like
tenor, in the name of the Holder or as the Holder (upon payment of any
applicable transfer taxes) may direct.
12. Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
any Warrant and, in the case of any such loss, theft or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount
to the Company or, in the case of any such mutilation, upon surrender and
cancellation of such Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
13. Remedies. The Company stipulates that the remedies at law of the
Holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
14. Company Records. Until this Warrant is transferred on the books
of the Company, the Company may treat the registered Holder hereof as the
absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
15. Compliance with Laws. The holder of this Warrant hereby agrees
that it shall not elect to receive shares of Common Stock of the Company upon
exercise of the Warrant so long as such election to receive such shares of
Common Stock would violate any statute, law, rule, regulation or requirement of
any governmental authority, regulatory agency or court, whether foreign,
federal, state, local or other, at law or in equity, including, without
limitation, the Bank Holding Company Act of 1956, as amended.
16. Miscellaneous.
16.1. Notices. All notices and other communications from the Company
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to the Holder of this Warrant shall be mailed by first class mail, postage
prepaid, or sent by a recognized overnight delivery service to such address as
may have been furnished to the Company in writing by such Holder, or until an
address is so furnished, to and at the address of the last Holder of this
Warrant who has so furnished an address to the Company. All communications
from the Holder of this Warrant to the Company shall be mailed by first class
mail, postage prepaid, or sent by a recognized overnight delivery service to
the Company at 11413 Isaac Newton Square, Reston, Virginia 22090, Attn:
President, or such other address as may have been furnished to the Holder in
writing by the Company.
16.2. Amendment; Waiver. Except as otherwise provided herein, this
Warrant and any term hereof may be amended, waived, discharged or terminated
only by an instrument in writing signed by the party against which enforcement
of such amendment, waiver, discharge or termination is sought.
16.3. Governing Law; Descriptive Headings. This Warrant shall be
construed and enforced in accordance with and governed by the internal laws of
the Commonwealth of Pennsylvania, without giving effect to the conflict of laws
principles thereof. The headings in this Warrant are for purposes of reference
only, and shall not limit or otherwise affect any of the terms hereof.
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<PAGE> 19
IN WITNESS WHEREOF, and intending to be legally bound hereby, this
Agreement has been duly signed, sealed and delivered by the undersigned as of
the day and year specified at the beginning hereof.
CORPORATE SEAL BEST SOFTWARE, INC.
ATTEST:
By:
- -------------------------------- ----------------------------------
Name: Shelley Reback Name:
Title: Asst. Secretary Title:
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EXHIBIT A
SUBSCRIPTION AGREEMENT
[To be signed only upon exercise of Warrant]
To: BEST PROGRAMS, INC. Date:
The undersigned, the Holder of the within Warrant, pursuant to the
provisions set forth in the within Warrant, hereby irrevocably elects to
exercise the purchase rights represented by such Warrant for, and agrees to
subscribe for and purchase thereunder, ______ shares of Common Stock covered by
such Warrant and herewith makes payment of $_________ therefor, and requests
that the certificates for such shares be issued in the amount of and delivered
to ___________________________________ whose address is: ____________________
and whose federal tax identification number is: ______________. If said number
of shares is less than all the shares covered by such Warrant, a new Warrant
shall be registered in the name of the undersigned and delivered to the address
stated below.
Signature
---------------------------------
(Signature must conform in all
respects to name of Holder as
specified on the face of the Warrant
or on the form of Assignment
attached as Exhibit B thereto.)
Address
-----------------------------------
-----------------------------------
Federal Tax Identification No.
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<PAGE> 21
Signature Guarantee:
EXHIBIT B
ASSIGNMENT
[To be signed only upon transfer of Warrant]
For value received, the undersigned hereby sells, assigns and transfers
all of the rights of the undersigned under the within Warrant with respect to
the number of shares of the Common Stock covered thereby set forth below, unto:
Federal Tax
Name of Assignee Address identify. No. No. of Shares
- ----------------- --------- -------------- --------------
Dated:
Signature
----------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of the
Warrant.)
Address
----------------------------------------------
----------------------------------------------
Federal Tax Identification No.
-------------------------
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Signature Guarantees:
EXHIBIT D
[LETTERHEAD OF PNC LEGAL DEPARTMENT]
March ___, 1993
Best Programs, Inc.
11413 Isaac Newton Square
Reston, Virginia 22090
Re: Loan and Warrant Purchase Agreement
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 4.10(c) of the
Loan and Warrant Purchase Agreement dated March 2, 1993 (the "Loan Agreement")
between you and PNC Capital Corp, a Delaware corporation (the "Company"),
pursuant to which the Company is purchasing a Non-Revolving Subordinated
Promissory Note dated March 3, 1993 in the maximum principal amount of
$5,000,000 (the "Note") and a Warrant (the "Warrant") representing the right to
purchase certain shares of the Common Stock of Best Programs, Inc., subject to
adjustment as provided therein. Capitalized terms defined in the Loan
Agreement or the Warrant and not otherwise defined herein are used herein with
the meanings so defined.
I have acted as counsel to the Company in connection with its
internal affairs and render this opinion in connection with the transactions
contemplated by the Loan Agreement. In this regard, I have examined an
executed counterpart of the Loan Agreement and such other documents, records
and matters of law as I have deemed necessary for purposes of this opinion.
Based upon the foregoing, and subject to the qualifications set forth herein,
it is my opinion that:
1. The Company is a corporation duly organized, existing and in good
standing under the laws of the State of Delaware and has all
requisite corporate power adequate to own its property and carry on
its business as presently conducted.
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<PAGE> 23
2. The execution and delivery of the Loan Agreement and the Other
Documents to which the Company is a party and the performance by the
Company of its obligations thereunder and of the transactions
contemplated thereby are within its corporate power and authority,
have been authorized by proper corporate proceedings and do not
contravene any provision of its Certificate of Incorporation or
By-Laws or, to my knowledge, contravene any provision of, or
constitute an event of default under, any other material agreement,
instrument or undertaking binding on the Company.
3. The Loan Agreement and the other Documents to which the Company is a
party have been duly authorized, executed and delivered by the
Company, and constitute the legal, valid and binding obligations of
the Company, enforceable against the Company in accordance with their
respective terms, except as such enforceability may be limited by
applicable bankruptcy, moratorium, fraudulent conveyance, insolvency
or other similar laws affecting the rights of creditors generally and
by general principles of equity (whether enforcement is sought by
proceedings in equity or at law).
I am admitted to practice law only in the Commonwealth of Pennsylvania
and do not hold myself out as being an expert on the laws of any other
jurisdiction. The foregoing opinions are limited to the laws of the
Commonwealth of Pennsylvania, the corporation law of the State of Delaware and
the federal laws of the United States of America as such federal laws pertain
to small business investment companies and banking generally.
This opinion speaks only as of today's date, and is limited to present
statutes, regulations and judicial interpretations. In rendering this opinion,
I assume no obligation to revise or supplement this opinion should the present
laws be changed by legislative or regulatory action, judicial decision or
otherwise. This opinion is furnished to you solely in connection with the
Company's purchase of the Note and the Warrant pursuant to the Loan Agreement
and may not be relied upon by any other person or entity or by you in any other
context.
Very truly yours,
EXHIBIT E
REGISTRATION RIGHTS AGREEMENT
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<PAGE> 24
THIS REGISTRATION RIGHTS AGREEMENT dated as of the ____ day of March, 1993
(the "Agreement"), by and between BEST PROGRAMS, INC., a Virginia corporation
(the "Company") and PNC CAPITAL CORP, a Delaware corporation (the
"Stockholder");
WITNESSETH:
WHEREAS, the Company and Stockholder are parties to a certain Loan and
Warrant Purchase Agreement dated as of March 2, 1993 (the "Purchase
Agreement"); and
WHEREAS, pursuant to the terms of the Purchase Agreement, the Company
issued to the Stockholder a certain Non-Revolving Subordinated Promissory Note
dated March 2, 1993 (the "Note") and a certain warrant for the purchase of
shares of Common Stock of the Company dated as of the date hereof (the
"Warrant"); and
WHEREAS, the Stockholder and the Company desire to provide for certain
registration rights for the shares of the Common Stock of the Company issuable
upon exercise of the Warrant;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, and intending to be legally bound, the parties
hereto hereby agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, without stated par value,
of the Company.
"Conversion Stock" shall mean the Common Stock issued or issuable
pursuant to exercise of the Warrant.
"Holder" shall mean the Stockholder, so long as it holds Registrable
Securities, and any person holding Registrable Securities to whom the
rights under this Agreement have been transferred in accordance with
Section 9 hereof.
"Registrable Securities" shall mean the Conversion Stock and any Common
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<PAGE> 25
Stock of the Company issued or issuable in respect of the Conversion Stock,
upon any stock split, stock dividend, recapitalization, or similar event;
provided, however, that shares of Common Stock or other securities shall no
longer be treated as Registrable Securities if (A) they have been sold to or
through a broker, dealer, or underwriter in a public distribution or a public
securities transaction, (B) they have been sold in a transaction exempt from
the registration and prospectus delivery requirements of the Securities Act so
that all transfer restrictions and restrictive legends with respect thereto
were or could have been removed upon the consummation of such sale, or (C) in
the case of a holder who then holds less than 1% of the outstanding Common
Stock of the Company (assuming conversion of all securities convertible into
Common Stock of the Company), such shares are, in the reasonable opinion of
counsel for the Company, available for sale in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act so that
all transfer restrictions and restrictive legends with respect thereto may be
removed upon the consummation of such sale.
The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, other than Selling
Expenses (as defined below), incurred by the Company in complying with Section
2 hereof, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses, the expense of any special audits
incident to or required by any such registration (but excluding the
compensation of regular employees of the Company, which shall be paid in any
event by the Company), and the reasonable fees and disbursements of one counsel
for all Holders.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions, and stock transfer taxes applicable to the securities registered
by the Holders.
2. Company Registration.
(a) Notice of Registration. If at any time or from time to
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<PAGE> 26
time the Company shall determine to register any of its securities either for
its own account or the account of a security holder or holders, other than (i)
a registration relating solely to employee benefit plans, (ii) a registration
relating solely to a Commission Rule 145 transaction or (iii) any other
registration that is not in the reasonable determination of the Company
appropriate for the registration of Registrable Securities, the Company will:
(A) promptly give to each Holder written notice thereof; and
(B) include in such registration (and any related
qualification under blue sky laws or other compliance), in accordance
with the Company's intended method of distribution of Common Stock
pursuant to the registration statement relating thereto, and in any
underwriting involved therein, all the Registrable Securities specified
in a written request or requests, made within 20 days after receipt of
such written notice from the Company, by any Holder.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2(a). In such event the right of any Holder to registration
pursuant to Section 2 shall be conditioned upon such Holder's participation in
such underwriting, and the inclusion of Registrable Securities in the
underwriting shall be limited to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement selected in
customary form with the managing underwriter for such underwriting by the
Company. Notwithstanding any other provision of this Section 2, if the managing
underwriter determines that marketing factors require a limitation of the
number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities to be included in such registration. The Company shall
so advise all Holders and the other holders distributing their securities
through such underwriting and the number of shares of Registrable Securities
and other securities that may be included in the registration and underwriting
shall be allocated among all holders thereof pro rata based on their total
ownership of shares of Common Stock (giving effect to the conversion into
Common Stock of all securities convertible thereto). If any Holder or holders
would thus be entitled to include more securities than such Holder or holder
requested to be registered, the excess shall be allocated among other
requesting Holders and holders pro rata in the manner described in the
preceding sentence. To facilitate the allocation of shares in accordance with
the above provisions, the Company may round the number of shares allocated to
any Holder or any other
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<PAGE> 27
holder proposing to distribute these securities through such underwriting to
the nearest 100 shares. If any Holder or holder disapproves of the terms of
any such underwriting, he may elect to withdraw therefrom by written notice to
the Company and the managing underwriter.
(c) Right of Company to Terminate Registration. The Company shall
have the right to terminate or withdraw without liability or penalty any
registration initiated by it under this Section 2 prior to the effectiveness of
such registration whether or not any Holder (or other holder of securities
entitled to inclusion in such registration has elected to include securities in
such registration.
3. Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not enter into any agreement granting
any holder or prospective holder of any securities of the Company registration
rights with respect to such securities unless (i) such new registration rights,
including standoff obligations, are on a pari passu basis with those rights of
the Holders hereunder; or (ii) such new registration rights, including standoff
obligations, are subordinate to the registration rights granted Holders
hereunder.
4. Expense of Registration. All Registration Expenses incurred in
connection with all registrations pursuant to Section 2 shall be borne by the
Company. All Selling Expenses relating to securities registered on behalf of
the Holders or other holders registering securities shall be borne by the
Holders or holders of such securities pro rata on the basis of the number of
shares so registered.
5. Registration Procedures. In the case of each registration effected
by the Company pursuant to this Agreement, the Company will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration statement
with respect to such securities and exercise reasonable efforts to cause
such registration statement to become and remain effective for at least 120
days or until the distribution described in the registration statement has
been completed; and
(b) Furnish to the Holders participating in such registration and
to the underwriters of the securities being registered such reasonable number
of copies of the registration statement, preliminary prospectus, final
prospectus, and such other documents as such Holders or
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<PAGE> 28
underwriters may reasonably request in order to facilitate the public offering
of such securities.
6. Indemnification.
(a) To the extent permitted by law, the Company will indemnify each
Holder and other holder participating in a registration pursuant to this
Agreement, each of its officers and directors and partners, and each person
controlling such Holder or holder within the meaning of Section 15 of the
Securities Act, with respect to which registration has been effected pursuant
to this Agreement, and each underwriter, if any, and each person who controls
any underwriter within the meaning of Section 15 of the Securities Act, against
all expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or
any amendment or supplement thereto, incident to any such registration or based
on any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, or any violation by
the Company of the Securities Act or any rule or regulation promulgated under
the Securities Act applicable to the Company in connection with any such
registration, and the Company will reimburse each such Holder or holder, each
of its officers and directors, and each person controlling such Holder or
holder, each such underwriter and each person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in
any such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission or
alleged untrue statement or omission, made in reliance upon and in conformity
with written information furnished to the Company by an instrument duly
executed or certified to be correct by or on behalf of such Holder or holder,
controlling person, or underwriter and stated to be specifically for use
therein.
(b) To the extent permitted by law, each Holder or holder will, if
Registrable Securities or other securities held by such Holder or holder are
included in the securities as to which such registration is being effected,
indemnify the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the
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<PAGE> 29
meaning of Section 15 of the Securities Act, and each other such Holder or
holder, each of its officers and directors and partners, and each person
controlling such Holder or holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, of any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse the Company, such Holders or holders, such directors, officers,
persons, underwriters or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular, or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by or on behalf of such Holder or holder and stated to be
specifically for use therein.
(c) Each party entitled to indemnification under this Section 6 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense. The failure of any Indemnified Party to give
notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 6 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such
action. The Indemnifying Party shall not assume the defense for matters as to
which there is a conflict of interest between, or separate and different
defenses to be relied upon by, the Indemnified Party and Indemnifying Party.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement that does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. No
Indemnified Party shall consent to entry of any judgment or enter into any
settlement without the consent of each Indemnifying Party.
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<PAGE> 30
7. Information by Holder. The Holder of Registrable Securities
included in any registration shall furnish to the Company such information
regarding such Holder and the Registrable Securities or other securities held
by it as the Company may request in writing and as shall be required in
connection with any registration pursuant to this Agreement.
8. Rules 144 and 144A Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission that may at any
time permit the sale of the Registrable Securities to the public without
registration, after such time as a public market exists for the Common Stock of
the Company, the Company agrees to exercise reasonable efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rules 144 and 144A respectively under the
Securities Act, at all times after the date that the Company becomes
subject to the reporting requirements of the Securities Act or the
Securities Exchange Act of 1934, as amended;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the
Securities Exchange Act of 1934, as amended (at any time after it has
become subject to such reporting requirements); and
(c) So long as the Stockholder owns any Registrable Securities,
furnish to the Stockholder forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of Rules
144 and 144A respectively (at any time after 90 days after the effective
date of the first registration statement filed by the Company for any
offering of its securities to the general public), and of the Securities
Act and the Securities Exchange Act of 1934, as amended (at any time after
it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports
and documents of the Company and other information in the possession of or
reasonably obtainable by the Company as the Stockholder may reasonably
request in availing itself of any rule or regulation of the Commission
allowing the Stockholder to sell any such securities without registration.
9. Transfer of Registration Rights. The right to cause the Company to
register securities granted to the Stockholder under Section 2 may be assigned
to a transferee or assignee in connection with any transfer or assignment of
Registrable Securities by the Stockholder provided that: (a) such transfer may
otherwise be effected in accordance with applicable securities laws, (b) such
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<PAGE> 31
assignee or transferee acquires at least 30% of the Registrable Securities
(subject to appropriate adjustment for stock splits, dividends, subdivisions,
combinations, recapitalizations, and the like), (c) prompt written notice of
the assignment or transfer is given to the Company, and (d) such assignee or
transferee agrees to be bound by the obligations of the Stockholder under this
Agreement.
10. Consolidating Agreement. The Stockholder agrees to negotiate in
good faith with the Company and with the other stockholders to whom the Company
has granted registration rights for the purpose of entering into a single
registration rights agreement on terms substantially similar to the terms of
this agreement. It is anticipated that such agreement shall also include an
agreement by the Stockholder and the other stockholders to refrain from selling
their Common Stock for a reasonable period of time following a registered
public offering involving an underwriting, if the underwriters of such offering
determine that such an agreement is necessary or desirable.
11. Notices. All notices, requests, demands or other communications
to or upon the respective parties hereto shall be in writing and shall be
deemed to have been given or made when delivered by hand or by messenger, or
three days after deposited in the mails, registered or certified with postage
prepaid, addressed to the Company at 11413 Isaac Newton Square, Reston,
Virginia 22090, to the attention of the Chairman of the Board, and to the
Stockholder at its address as set forth in the stock records of the Company, or
to such other address as either of them shall specify in writing to the other
by notice made in compliance herewith.
12. Amendment, Modification and Waiver. This Agreement may not be
amended or modified, or any provision hereof waived except by a writing duly
executed by the parties hereto, except that, in the case of a waiver, such
writing need be executed only by the waiving party.
13. Governing Law. This Agreement, and the rights and obligations of
the parties hereunder, shall be construed and interpreted in accordance with
and governed by the internal laws of the Commonwealth of Pennsylvania, without
giving effect to the conflict of laws principles thereof.
14. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together
shall constitute one and the same instrument.
15. Captions. The descriptive headings of the Sections of this
Agreement are inserted for convenience only and shall not affect the meaning,
construction
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<PAGE> 32
or interpretation of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
ATTEST: BEST PROGRAMS, INC.
By:
- ---------------------------------- ---------------------------------
Name: Name: Melody S. Ranelli
---------------------------- Title: Executive Vice President and
Title: Chief Financial Officer
----------------------------
PNC CAPITAL CORP
By:
---------------------------------
Name: Peter V. Del Presto
Title: Vice President
32
<PAGE> 1
BEST SOFTWARE, INC.
11413 Isaac Newton Square
Reston, Virginia 20190
September , 1997
Mr. James F. Petersen
c/o Best Software, Inc.
11413 Isaac Newton Square
Reston, Virginia 20190
Dear Mr. Petersen:
Reference is made hereby to that certain Underwriting Agreement (the
"Underwriting Agreement") of even date among Best Software, Inc. (the
"Company"), the Selling Shareholders identified therein, including you, and
Hambrecht & Quist LLC and William Blair & Company, as representatives of the
several Underwriters identified therein. The Underwriting Agreement relates to
the initial public offering (the "Offering") of Common Stock of the Company,
which has been registered under the Securities Act of 1933, as amended. You
are including shares of Common Stock in the Offering pursuant to your rights
under that certain Consolidating Registration Rights Agreement dated as June 3,
1993 among the Company, you and certain other shareholders of the Company (the
"Registration Rights Agreement"). Capitalized terms not otherwise defined
herein shall have the respective meanings ascribed to them in the Underwriting
Agreement. The purpose of this letter agreement is to confirm and modify
certain provisions of the Registration Rights Agreement in connection with the
Offering and the Underwriting Agreement as follows:
1. The Company agrees to indemnify you, in your capacity as a
Selling Shareholder in the Offering, to the same extent as contemplated
by Section 6(a) of the Registration Rights Agreement and subject to
the provisions of Section 6(c) of the Registration Rights Agreement,
for any losses, claims, damages or liabilities to which you become
subject arising out of any breach of the representations and
warranties contained in Section 2(a) of the Underwriting Agreement;
provided, however, that this indemnity shall not extend to any breach
of such representations and warranties
<PAGE> 2
Mr. James F. Petersen
September , 1997
Page 2
arising out of factual matters known to you and not known to the
Company.
2. The Company hereby confirms its understanding that certain
provisions of the Underwriting Agreement creating an obligation on the
part of the Selling Shareholders to reimburse or indemnify the
Underwriters for certain expenses in connection with the Offering
(including Sections 8, 9 and 10) are intended for the benefit of the
Underwriters and do not affect the agreement relating to the
allocation of expenses of the Offering contained in Section 5 of the
Registration Rights Agreement. In particular, the Company hereby
confirms its obligation to pay all "Registration Expenses" (as defined
in the Registration Rights Agreement) in connection with the Offering
notwithstanding such provisions of the Underwriting Agreement. Nothing
in this letter agreement shall be deemed to constitute a waiver of any
rights or remedies the Company may have if the Underwriting Agreement
is terminated by the Underwriters due to a default by you in performing
your obligations thereunder.
3. The Company further confirms that, as between the Company and
you, the Underwriting Agreement does not supersede or modify the
Registration Rights Agreement with respect to Sections 5 and 6 thereof.
Please indicate your agreement to the foregoing by executing the
enclosed counterpart copy of this letter and returning it to the
undersigned.
BEST SOFTWARE, INC.
By:
----------------------
Name:
Title:
Accepted and Agreed:
------------------------
James F. Petersen
<PAGE> 1
EXHIBIT 24.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Washington, D.C.
September 24, 1997
